EUROPEAN FISCAL
The Italian budget deficit fell to 6.3% of GDP in Q2 (4Q rolling sum) from 6.7% in Q1. Lower expenditures drove the improvement, falling to 53.9% vs 54.3% prior. Revenues were steady at 47.6% and interest expenditure ticked a tenth higher to 3.9%.
- This allowed the primary deficit to ease to 2.4% (vs 2.9% in Q1), its lowest since June 2020.
- Italy’s medium-term fiscal plan, presented at the start of this week, saw the budget deficit falling to 3.8% of GDP by the end of 2024, thus requiring a large, almost 3pp of improvement in 2H24.
- Failure to meet (or at least get close to) the 2024 forecast will damage the credibility of the medium-term plan for future years, in particular Italy’s target of bringing the deficit below the EU’s 3% limit by 2026.
- Alongside an improving primary balance, a key tenet of debt sustainability is the so-called “r-g” differential or the difference between the average interest rate paid on debt and the nominal GDP growth rate.
- This “r-g” differential rose to -1.1pp in the four quarters to Q2 (vs -2.1 in Q1 and -3.5 in Q4 2023). While still in stable (i.e. sub-zero) territory, anaemic nominal GDP growth (exacerbated by falling inflation rates) suggests this differential could continue to offer less favourable debt dynamics absent further primary balance improvements.
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