MNI EXCLUSIVE: As Growth Slows, Italy Govt Must Avoid VAT Hike

--Incoming Govt Must Curb stg12-15Bn Spending To Avoid Auto VAT Rise: Govt Off'l

     ROME (MNI) - Italy's higher deficit and lower growth forecast for next year

will push the incoming government to curb spending by around E12-15 billion in

order to avoid an automatic VAT spike in 2019-2020, a senior government official

told MNI.

     "Whichever party or coalition gets to govern will need to immediately

stave-off a significant VAT spike of roughly E12-15 billion starting in 2019,

which we have avoided in recent years by finding adequate resources. The main

risk is that a rise in VAT would automatically impact on growth and consumption

rates, thus worsening the outlook in a very critical moment," said the official.

     Last week Rome's outgoing government presented an 'incomplete' 2018 fiscal

plan, including updated economic data but leaving out fiscal goals for coming

years, goals which will be decided by whichever government comes in.

     That fiscal document will serve as a pillar for next budget that needs to

set out short-term reform and budget goals. 

     --OUTLOOK DOWNGRADED

     Economic optimism from the outgoing Democrat-led cabinet has, however, been

somewhat watered-down.

     "We were forced to increase the public deficit outlook from a previous 1.9%

in September to 2.3% because of the state resources used in recent bank rescues,

which weren't previously included in our forecasts," said the source. 

     Bank resolutions drained some E10-12 billion from public coffers last year.

     The GDP outlook is also a little less rosy. The fiscal plan confirmed

growth for this year at 1.5%, but it has been lowered to 1.4% in 2019. 

     One precondition for Italy to help tackle the end of the European Central

Bank's asset purchases program is for it to continue growing at a pace of at

least 1.5% over the next two years, as several other government economic

advisers have told MNI. 

     "We believe Italy's economy has the potential to perform better, but we

prefer to remain prudent at this stage, said the source. 

     --ROADBLOCK

     Italy's prolonged political stalemate is delaying the definition of any

future budget roadmap, as parties are failing to reach a government deal to exit

the stalemate. The transition period is proving to be a tough one, with the risk

of a fresh election looming large.

     Rome's government was always hopeful that the bank rescues would not weigh

on state spending towards calculating deficit levels given they were

extraordinary one-off measures taken to off-set systemic risks. But that view

clashed with European Union rules and with national statistics office ISTAT

calculation methods. 

     "We still believe these were exceptional measures that do not impact in the

long run on structural budget balance goals," said the official. 

     The outgoing Democrat government also highlighted that for the first time

in seven years, the country's elevated public debt -- the largest in volume in

the eurozone after Greece -- was finally starting to fall, though at an erratic

pace, added the official. 

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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