Italy Sets Lower Budget-Deficit Targets

Date: 04-10-2018
Source: The Wall Street Journal

The government said it targeted for 2020 a budget deficit of 2.1% of gross domestic product and 1.8% of GDP for the following year.

ROME—Italy’s government set its budget-deficit targets for 2020 and 2021 at lower levels than previously envisaged, after initial government plans had unnerved financial markets and European authorities.

The government on Wednesday said it targeted a budget deficit of 2.1% of gross domestic product for 2020 and 1.8% of GDP for the following year. The government had initially planned to target a deficit of 2.4% for both years.

It added it will stick to a deficit of 2.4% for next year, triple what the previous government had planned.

With these lower targets, the government appears to have adopted a more pragmatic stance after investors sold off Italian assets following news of the government plans to widen the deficit and keep it at 2.4% of GDP for the next three years.
Still, it will need to obtain European authorities’ approval to keep the 2019 deficit level, which the government says it needs in order to start implementing its electoral promises and rekindle economic growth.

“We aim to have public investments as the main tool to work on growth,” Economy Minister Giovanni Tria said.

Italian markets have fallen since Friday after the government significantly widened its budget-deficit target for next year, setting up a likely clash with the European Union, given the proximity to the bloc’s 3% limit.

Italian banks, which own billions of government bonds, have also been battered in markets, but staged a rebound on Wednesday amid earlier indications the budget deficit would shrink after next year.

The government, supported by the populist 5 Star Movement and League party, came to power in June promising to fight the strictures of the eurozone, which limit the ability of member countries to run wide deficits as those could undermine the economic stability of the common currency area.

The coalition pledged to slash taxes and increase welfare spending to help the poor and unemployed.

But such largess clashes with the reality of the country’s fragile finances. Italy’s debt, which is slightly more than 130% of gross domestic product, is the second largest after Greece’s.

The government says it plans to increase spending to spur economic growth and reduce the debt to 126.5% of GDP in 2021.

However, it stopped short of providing other key details, such as its targets for economic growth for the next three years.

The full budget will be unveiled in October and will be scrutinized by the European Commission, which could reject it. The Italian parliament will have until the end of the year to approve it.