MNI: Italy Knows Budget Over-Optimistic On Nominal GDP-Sources

The Italian government is aware that it could struggle to meet its 2023 budget deficit target of 4.5% of gross domestic product if measures to cushion business and households against soaring energy prices needed to be extended beyond March 31, two people familiar with the matter told MNI.

The budget’s assumption of nominal GDP growth of 4.8% next year is probably too optimistic, the officials said, making it harder for the deficit to keep within the targeted ratio. This year an unexpected surge in inflation swelled nominal GDP, flattering the borrowing figures, but this is unlikely to be repeated, they said, noting that energy support measures are currently costing the government around EUR6 billion a month.

The budget assumes real GDP will expand by 0.6% next year.

“I have no doubt that if we need to go beyond March a budget expansion will be required, and for that we will have a bigger deficit”, said one of the sources.

EUROPEAN UNION TO THE RESCUE

Positive scenarios in which this is unnecessary could include an easing of the energy crisis, reducing the cost of support, or more assistance from the European Union, the other source said. (See MNI: Italy Seeks Extensions To NextGenEU Deadlines)

In a parliamentary hearing this week, Finance Minister Giancarlo Giorgetti said tat the fact that the energy measures only last until the end of the first quarter was the result of guidance from the European Commission, which has asked for updates on the situation, but that they could be extended if necessary. Italian officials, when asked about what will happen after March, often say that the EU will have to help the country to find a solution.

While the final outcome for real GDP will be highly dependent on inflation and on the policies of the European Central Bank, next year’s real growth projection of 0.6% continues to be seen as prudent by officials and even by opposition parties, despite being above the 0.2% estimated by the International Monetary Fund.

“The Italian economy will continue to surprise to the upside,” said one source, though he added that GDP should contract for a period at the beginning of the year.

Monetary policy will also have a bearing on the ease or otherwise with which Italy will be able to finance its debt, which the budget projects will fall to 144.6% of GDP next year from 145.7% in 2022.

The government estimates gross borrowing will increase to EUR479 billion in 2023, from EUR418 billion this year.