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Italy's 2021 budget deficit could easily come in significantly below the 11.8% of GDP forecast by the government last week if the country's vaccine roll-out continues to gain pace and a return to tougher lockdowns is avoided, officials familiar with the matter told MNI.

The 11.8% estimate contained in the Treasury's annual Economic and Financial Document was based on a "conservative outlook" due to the still uncertain trajectory of the Covid-19 pandemic, a senior official said. Another source at the Finance Ministry pointed out that this conservative approach had also been applied for 2020, when the deficit came in at 9.5% instead of the 10.8% forecast.

The deficit could come in an "important" amount below forecast if an accelerating vaccination programme allows Italy to avoid a return to tougher lockdown restrictions and to manage a strong tourist season, even if this will still likely be far from pre-Covid levels. This should also permit emergency aid to struggling economic sectors to be phased out, a priority for the government of Prime Minister Mario Draghi, which does not want to allow the subsidies to become permanent, the officials said.

NEXT GENERATION EU

The government's broad approach is shared across the parties of Draghi's coalition, although there are disagreements on details of spending plans.

Another element of uncertainty is the timing of the delivery of emergency European funds from the EUR750 billion Next Generation EU programme, which has been thrown into question by an order from Germany's Constitutional Court to block that country's ratification of one of its legal underpinnings. But Italian officials told MNI they expect no "significant delay" in the arrival of the funds.

Italy will start to ease Covid restrictions from Apr. 26, in what Draghi called "a calculated risk". The government is also betting on structural reforms of the courts and public administration promised as a condition of obtaining Next Generation EU money to boost growth from this year.

A smaller deficit would feed through to less borrowing. After the government boosted its 2021 deficit forecast from the earlier 8.8% projection, Barclays said it expected an additional EUR40 billion of gross issuance.

MNI Rome Bureau | +34-672-478-840 | santi.pinol.ext@marketnews.com