MNI: Italy's 7-Year Adjustment To Lean On Spending-Sources

Italy’s seven-year fiscal adjustment plan to be presented to the European Commission in September will lean most heavily on spending cuts, though promises to support pensions and reduce taxes will also be trimmed back in a bid to restore a primary surplus, officials close to Finance Minister Giancarlo Giorgetti told MNI.

While the ministry is facing stiff internal resistance from departments trying to fend off cuts, Giorgetti wants to put an end to the recent practice by Italian governments of delaying structural reform by approving temporary one-year measures to reduce taxes and buoy pension spending, the sources said.

It has been particularly challenging to reverse measures put in place to support households and firms during the energy price spike, while the government is also trying to spread some of the high cost of its Superbonus housing renovation subsidies over a longer period, they said. The government's aim is to avoid any tax increases as part of the adjustment plan.

AIM FOR PRIMARY SURPLUS

But the government is convinced it needs to act decisively to avoid a bond-market selloff, and that it must restore a primary budget surplus if its debt reduction plans are to be credible, a source consulted in the preparation of the adjustment plan told MNI. (See MNI: EDPs Give EU Early Test Of New Fiscal Rules-Officials)

This year’s spending will not be within the scope of the plan, but officials said it was too soon to say whether revenues will fall short of expectations, which would make it necessary for the current 2024 budget to be trimmed in the summer.

The government has tried to ease funding pressures since 2022 when the European Central Bank wound down its quantitative easing programme by targeting more retail investors, but the appeal of inflation-linked BTP Italia securities is fading as inflation subsides, officials said.

The boost provided by the inflation of recent years to efforts to reduce Italy’s public-debt-to-GDP ratio, which eased from around 155% to 137% now, has also concluded, with officials expecting a rise above 140% in coming years if action is not taken.