Giorgia Meloni's government is facing a challenging situation as Italy's budget figures are expected to worsen significantly. The coalition leaders are meeting to discuss the escalating deficit, which is predicted to reach around 5% of the country's GDP in 2023. The weakened economic growth and the electoral promises, including tax cuts, are cited as the main contributors to this larger shortfall.
Furthermore, the cost of these promises and lower-than-anticipated growth could also impact next year's deficit forecast. The projection for 2022 may be widened to approximately 4%, compared to the current estimate of 3.7%. These figures are still under discussion, and a final decision has yet to be made.
The widening deficit poses additional pressure on Meloni's government to find ways to bolster finances. One potential solution being considered is the sale of state-owned companies, including Monte Paschi, to generate funds for new expenditures without further increasing the country's extensive debt.
The spread between Italian and German government bond yields, an indicator of risk, has risen to its highest level since July 11 on Wednesday, reaching around 174 basis points. However, overall, the measure has remained relatively stable this year, providing some relief for Meloni in managing the country's finances.
When accounting for the effects of changes in the treatment of housing renovation incentives known as the "superbonus," this year's deficit may appear even larger. These projections will be discussed in a crucial meeting in Rome, where Meloni will face the challenge of balancing her coalition's electoral promises with the need to maintain Italy's debt sustainability, particularly as European Union deficit limits come into effect.
JP Morgan analyst Marco Protopapa highlights that the upcoming 2024 draft budget law will be a significant test of the government's commitment to fiscal discipline. The additional resource shortage for flagship measures may intensify political debates in the coming weeks. Protopapa's own projection, including the effects of the "superbonus," anticipates a deficit of up to 6.5% in 2023.
Although Italy is currently exempt from EU fiscal rules due to the suspension of the Stability and Growth Pact, the situation will change next year. The deficit limit of 3% of GDP will be reinstated in 2024, and establishing a new framework to interpret these limits while considering country-specific issues is yet to be agreed upon.
The challenge for Meloni lies in striking a balance between maintaining stable public finances and fulfilling the electoral promises made by her Brothers of Italy party and its coalition partners, the Matteo Salvini League and Forza Italia, led by Antonio Tajani.
Italy's poor growth performance further complicates the situation. After a 0.6% expansion in the first quarter of this year, the economy contracted by 0.4% from April to June. Economists predict only minimal growth of 0.1% in the third and fourth quarters due to rising interest rates, weakened global export demand, and economic challenges in crucial partner countries like Germany.
Nevertheless, the government aims to maintain its growth targets for the year at around 1%, according to Economy Minister Giancarlo Giorgetti.
During the meeting of ministers today, each participant will strive to secure funds for their respective projects, including Meloni's electoral promises, such as tax cuts for wages, reductions for low-income families, continued support for energy bills for vulnerable Italians, and the retention of expensive retirement norms.