Most DMs Set For Fiscal Tightening But There Is A Wide Range [1/2]

[The below is taken from the MNI Macro Deep Dive, focusing on potential fiscal impulse in an election-heavy year. See the full report here].

Some key recent developments and near-term prospects:

• Italy: The very large tightening in 2024 is a function of paying for the Superbonus tax credits scheme, which was extended for a limited set of households into 2024 but has mostly concluded (see here and here). The payment saw the primary reason for the 2023 deficit reaching 7.2% GDP vs the government’s target of 5.3% GDP.
• UK: A caveat is required here as the latest OBR estimates from Mar’24 show notably less tightening (worth 0.9pps and then 0.6pps of tightening in FY 24/25 and FY 25/26 for about half the pace shown by the IMF figures). Further, we note the growing likelihood of another national insurance and/or income tax cut and/or stamp duty cut in September as the Conservative party looks to use another sweetener ahead of a general election seen in a base case as coming late this year. With the Labour party polling far more strongly, we would see risk of some easing in the short-term but there is further uncertainty here.
• Japan: The general sense is that fiscal policy is becoming less expansive particularly compared to the Covid years. 2025 in particular is seen with a sharp tightening in fiscal policy but we see a risk from the government’s low popularity in the polls and therefore potential for easier policy. The Tokyo gubernatorial election is scheduled for Jul 7 and PM Kishida’s current term as LDP president ends in late September before next year’s general election technically due by Oct 2025.