MNI: Italy To Raise 2023 Fiscal Deficit Target Close To 5% GDP

Italy is preparing to revise up its target for a fiscal deficit of no more than 4.5% of GDP in 2023 to almost 5% in its new macroeconomic framework in late September due to a worsening economic outlook and the impossibility of finding resources to finance promised tax cuts, sources close to the governing coalition told MNI.

While the final figure has yet to be defined it will be close to but below 5%, sources said. Finance Minister Giancarlo Giorgetti is expected to explore Italy’s margin with Brussels for increasing its deficit at the Ecofin meeting of eurozone finance ministers at the end of this week, when it is also expected that Italy will face renewed pressure to ratify changes to the European Stability Mechanism treaty, sources told MNI.

Rome’s ultimate goal is to seek some flexibility in the return of Europe’s Stability and Growth Pact after the escape clause currently waiving its rules on borrowing is set to expire at the end of the year, sources said.

Internal EU talks on reforming the Pact are bogged down and in recent public remarks Prime Minister Giorgia Meloni has said that a return to the old rules would have dramatic implications for Italy. (See MNI: Chances Rising Of Return To EU's Old Fiscal Rules IN 2024)

The government is expected to unveil a revised macroeconomic framework in late September to serve as a base for 2024 budget calculations.

OVER-OPTIMISTIC

When the government presented its macroeconomic framework in April it expected that its projection for growth of 1% would prove conservative, providing leeway to deliver on promised tax cuts for individuals and businesses, but now it seems to have been over-optimistic, sources told MNI.

While Meloni is still likely to take a step towards the promised flat tax system by reducing income tax thresholds from four to three, this will be costly, a source pointed out, and as a structural change cannot be financed by a one-off measure like the ongoing spending review from which the government hopes to save EUR300 million. (See MNI: Italy Seeks EUR13-14 Bln From Taxes For 2024 Budget)

Next year’s budget will also include a reform of the pensions system and allocate an additional EUR4 billion for healthcare, mainly in order to raise wages.

This year’s public finances have also been affected by the impact of fiscal incentives for home improvements implemented under previous governments.

The Superbonus 110% programme of tax credits for construction has already made Italy revise its deficits from 2020 and 2022 after a Eurostat ruling on how it should be classified in state accounts. Last year’s deficit calculation had to be increased from 5.6% of GDP to 8% in response to the Eurostat decision.