MNI: Italy's Coalition Eyes Bigger 2023 Deficit Target-Sources

Italy’s incoming right-wing coalition government has agreed on its first economic policy measures, and is already thinking about running a larger budget deficit next year, despite distractions from internal arguments over ministerial jobs, coalition sources told MNI.

Among measures to be approved in days after the government is expected to be formed next week are a EUR5 billion decree extending energy support measures, currently due to expire on Nov 30, through December, sources said. Higher revenues from indirect taxes and a windfall tax on energy companies will mean that this should not affect the 2022 fiscal deficit target of 5.1% of gross domestic product, they said.

The sources noted however that Italy’s deficit objective has been reduced by 0.5 percentage point since the beginning of the year, and added that the coalition may try to take measures which would expand next year’s deficit by an equivalent amount.

Work on the 2023 budget law will start later than usual, meaning a tight schedule for lawmakers, though the caretaker administration of Prime Minister Mario Draghi has already approved its broad outlines. (See MNI INTERVIEW: Italy Budget To Keep Draghi Outline-Meloni Aide)

NEXT YEAR'S DEFICIT

So far budget discussions have not led to agreement on practical measures, said a source in the right-wing Brothers of Italy, the coalition’s largest party, adding that the new government was nonetheless likely to make an official request to the European Union to run a larger deficit than the 3.4% of GDP currently foreseen. This projected deficit is below the 3.9% expected for the year at the beginning of 2022, sources said, though they acknowledged that the rise in borrowing costs and an economic slowdown will limit the scope for action by likely new prime minister Giorgia Meloni, who has already seen herself embroiled in a dispute with coalition partner Silvio Berlusconi over ministerial positions for his Forza Italia party.

Priorities for 2023 include finding fiscal space to continue to mitigate the impact of higher energy costs, whose cost is impossible to predict. Reducing the tax wedge – the ratio between taxes paid by worker and the total cost of employment to employers – for incomes under EU35,000 could cost about EUR4 billion, the sources said. The coalition will take steps in the direction of a flat tax system and is also likely to declare an amnesty for unpaid taxes, sources said.

Agreement seems some distance away on new pension rules, after Draghi pushed back by one year the introduction of unpopular reforms introduced by former Labour Minister Elsa Fornero, which became synonymous with the austerity drive during the government of Mario Monti. A return to the old Quota100 system –which allows retirement at 62 if the sum of an individual’s age and the number of years they have worked adds up to 100 – would be too expensive, the sources said.

Inflation indexation means Italy’s pension spending will jump 7.9% in 2023, the government’s economic projections show.