MNI: Italy To Overshoot 2024 Fiscal Target - Sources
MNI (ROME) - Italy’s 2024 fiscal deficit is likely to be 0.1-0.2 percentage point higher than its target of 3.8% of GDP, and the country’s debt-to-GDP ratio could finish the year two percentage points above the 134.8% forecast by the government in September, as growth comes in below its projections, two sources close to the matter told MNI.
The Italian government has maintained its 2024 growth forecast at 1%, even as the Bank of Italy, the IMF, and European Commission downgraded their projections to 0.7%-0.8%. Recent data implies the latter numbers are likely to prove more accurate, the sources conceded.
“Italy has closed these past years with growth figures that have been repeatedly revised upwards since 2021, along with deficit and debt levels,” one source added, noting that the government has been better at forecasting Italian growth than many external observers.
Traditionally, Italian officials estimate that every tenth of a percentage point deviation in growth equates to around EUR2 billion in additional issuance, though this can vary.
“The government was expecting strong growth in nominal GDP, which might not materialise,” one of the sources explained, adding that this was why the debt-to-GDP ratio would be more affected than the fiscal deficit. The government’s nominal growth forecast was significantly higher than those of the European Commission and other institutions, the source added.
Despite lower-than-expected growth, government officials claim they do not regard this as a “worrying situation” due to the favourable trajectory of Italy’s debt ratio in recent years and prospects for relatively strong growth in 2025.
DEBT-TO-GDP RELATIVELY STABLE
Italy’s debt-to-GDP ratio remained roughly stable from 2019 to 2023, unlike those of other major European economies, where pandemic responses drove it higher, even in growth leader Spain, one source noted. But official data also shows that Italy has faced challenges in containing net expenditure growth since 2022, with an ageing population expected to drive costs higher in the coming years.
“As long as the recovery expected for 2025 materialises, debt sustainability concerns should not re-emerge,” another source said, adding that Italy could benefit significantly from the European Central Bank’s easing cycle. (See MNI SOURCES: ECB Heads For 25BP Cut; Risks From Trump, Germany)
The potential impact of trade tensions, including tariffs announced by U.S. President-elect Donald Trump, has yet to be factored in, but could weigh further on growth, the sources cautioned.
The government had already flagged In April that its debt-to-GDP ratio in the 2024-2026 period would be heavily influenced by cash requirements linked to tax offsets provided under the Superbonus scheme to subsidise home improvements introduced in 2020.
The debt ratio is only expected to start declining from 2027, in line with new EU rules requiring an average annual reduction of one percentage point of GDP and after Italy concludes its Excessive Deficit Procedure, according to an official document in September. (See INTERVIEW: Fiscal Contraction To Give ECB More Room To Cut)