The Update Note to the budget shows little ambition in strengthening growth or shoring up public finances. |
On 30 September the newly formed Italian government published an update to April’s Economic and Finance Document, with new fiscal plans for the years 2019 to 2022 and changes to the underlying economic assumptions. In a nutshell, the Update Note to the budget shows little ambition in strengthening growth or shoring up public finances, while relying on a few assumptions still uncertain to materialise and highlighting the clear weakness of a highly indebted country. The Update Note generated little surprise, as the deficit target proposed (2.2%) was broadly in line with the expectations and plans announced by government officials. The Update Note, as of now, sets the framework broadly in terms of economic projections and deficit targets. The actual ways to achieve the goals will be elaborated in more detail by 15 October (when the document must be submitted to the EC) and further by 31 December, when the budget law must be finally approved by the Italian Parliament. Although 2.2% seems little different from the 2.4% targeted earlier, it is in reality different in terms of its composition. Underlying growth assumptions have been scaled down significantly, and there is no increased deficit projection (2019 and 2020 remain at 2.2%), while proceeds from privatisations have been scaled back to easier-to-achieve targets. Yet, some critical points and questionable assumptions remain:
It can be seen, broadly speaking, as a transitional budget, where the government has tried to remain in line with the goals stated in its program released few weeks ago, i.e., to try to deliver a mildly expansionary budget without putting public finances at risk, and to remain within the spirit of the Stability and Growth Pact (SGP). As we argued, it is equivalent to walking on a tightrope with high risks of losing one’s balance. |
The government is implicitly relying on some level of flexibility by the EU Commission. |
Was the budget able to connect all dots the government wanted to tick?
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The size of the output gap and the phase of the economic cycle are one of the grounds under which Italy could try to ask for additional flexibility. |
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The government estimates that the new policies could add 0.2% to GDP growth in 2020 and 2021. |
Will we be changing our expectations?Not likely, not yet and not for the budget. Any revision to our expectations will likely follow developments on the external front more than embedding the implications from the new budget. The most significant “domestic” development that could impact our forecasts would be a pickup in investments that may benefit from the lower yield curve, in addition to continued fiscal support for the Industry 4.0 incentives, which could pose an upside risk to our projections. Other measures, such as the avoided VAT hike, may not have such a large impact, as economic operators may have already been discounting what the government finally did, as broadly announced. We currently expect growth to be 0.1% in 2019 and 0.4% in 2020, which is exactly the baseline scenario in the Update Note. |
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Economic impact estimated by the Government. On top of these estimates, the government estimates that the new policies could add 0.2% to GDP growth in 2020 and 2021, as the table above shows. The introduction of the measure to reduce labour costs may have a positive impact (estimated at 0.1% of GDP by the government), similar to the extension of existing policies, in particular Industry 4.0 (0.1% of GDP). The avoidance of VAT hike should boost GDP by 0.3% in 2020. The funding measures, which are expected to have a low multiplier and are limited in size, should subtract 0.2% from GDP. In total, this should have an economic impact of 0.2% of GDP, lifting the economic projections from the baseline 0.4% to 0.6%. |
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