Dalla Presidenza del Consiglio dei Ministri:
The Government takes stock of the European Commission’s assessment of fulfilment of the debt-reduction rule in 2018, according to which the opening of an excessive deficit procedure is warranted. In the Report on Debt Developments that was sent to the Commission on 31 May, the Government illustrated a series of relevant factors explaining why the debt-reduction rule was not fulfilled. In addition, the Government provided information and estimates suggesting that this year Italy will fulfil the rules of the Stability and Growth Pact (SGP).
The Government intends to continue the dialogue with the Commission. To this end, we illustrate below the recent trends in the public finances, their drivers and, importantly, the initiatives that will be undertaken to ensure consistency with the SGP.
With respect to last year, it is important to recall that budget execution was consistent with the Budget approved by the previous parliament without any loosening of the fiscal stance. That did not change even when signs of a cyclical slowdown, largely driven by an exogenous downturn in manufacturing trade and production, became apparent at the end of last summer.
The Government recognises that the previous administration had committed to a 0.3 percentage point improvement in the structural budget balance for 2018. However, it should be considered that final data revealed an unforeseen increase in capital transfers. In addition, the downward revision to the growth forecast for the coming years led to a change in the output gap estimate for 2018, which in turn adversely impacted on structural balance evaluations, including the one published by the Government.
Looking forward, the most up-to-date estimates for this year suggest that the public finances will comply with the rules of the preventive arm of the SGP. The Government will be able to provide more reliable estimates at the end of July, as soon as data on mid-year tax payments become available. Based on available information, the deficit appears likely to come in significantly below the Commission’s forecast, which is of 2.5 percent of GDP versus the Government’s 2.4 percent.
Starting from the projection published in the Stability Program, which incorporates a 2 billion expenditure break as long as the annual deficit forecast exceeds 2 percent of GDP, the latest assessment reveals higher revenue from taxes and social security contributions worth 0.17 percent of GDP and extra dividend inflows equivalent to 0.13 percent of GDP. On the other hand, a prudential evaluation of expenditures and items that may need to be refinanced in the mid-year budget review could amount to 0.12 percent of GDP. The net improvement in the budget balance compared to the Stability Program would thus be of 0.2 percentage points, taking the deficit down to 2.2 percent of GDP.
Based on the Commission’s macroeconomic forecast and output gap estimate, a 2.2 percent deficit would yield a structural improvement of 0.1 percentage points. Such result would be SGP compliant and significantly better than the objective agreed with the Commission in December.
The assessment of budgetary trend should also take into account the effects of lower expenditures stemming from the prudential estimates of the resources needed for the implementation of the most relevant policies adopted by the Government last year. The latest data indicate that outlays could be 0.07 percent of GDP lower than expected, which would take the deficit down to 2.1 percent of GDP. The structural balance would improve further, providing a larger offset for the 2018 gap vis-à-vis the SGP benchmark.
The Government is monitoring the public finances on an ongoing basis and is committed to achieving the objective on the structural balance and to adopt all necessary precautions and initiatives to that end.
Lastly, we recall that the three-year budgetary plan presented in the Stability Program and approved by Parliament foresees a decline of the nominal deficit to 1.5 percent of GDP in 2022, with a cumulative improvement in the structural balance of close to 0.8 percentage points. The primary structural surplus would reach 3.1 percent of GDP in 2022.
For 2020, the Government intends to achieve an improvement of 0.2 percentage points in the structural budget balance. Given the latest official macroeconomic forecast, the headline deficit would decline by 0.3 points compared to 2019.
The Government will seek a constructive dialogue with the Commission concerning the achievement of the budgetary objectives for this year and a deficit-reduction strategy for the coming years consistent with the commitments already endorsed by the Italian parliament.
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