Italian Prime Minister Giorgia Meloni is revising her plans to reduce Italy's budget deficit in line with the European Union's 3% limit next year, according to sources familiar with the matter. The projected deficit for 2024 may now widen to approximately 4.5% due to a weaker economy and the need to fulfill tax-cut promises made to voters. This figure is higher than the original projection of 3.7% made in April.
Furthermore, the deficit for 2023 is expected to reach as high as 5.5% due to lower-than-anticipated economic growth of 0.8%. These projections pose a significant challenge for the coalition government, as they try to balance the pressure of delivering on generous election promises while grappling with strained public finances.
The situation is set to become even more difficult next year as the European Union ends the suspension of its deficit regime, which was introduced during the pandemic. This will draw attention to heavily indebted countries like Italy that are not aligning with the EU's fiscal discipline requirements.
Although the deficit is projected to narrow, the markets are already feeling unsettled. The spread between Italian 10-year bonds and safer German securities has widened by nearly 30 basis points within the past month alone. Currently trading at over 194 basis points, the spread is at its widest since early May. This growing unease reflects concerns about the government's deteriorating finances.
Earlier this year, Finance Minister Giancarlo Giorgetti had suggested that a surge in tourism could drive overall economic growth above 1% in 2023. However, this optimistic scenario seems increasingly unlikely as Italy faces the impact of the global slowdown in industrial demand.
The pressure on Meloni is further compounded by the demands of a fractious coalition and the recent data revisions that changed the treatment of generous tax breaks granted by a previous government. Managing these challenges and finding a way to balance the books while delivering on promises will be crucial as the government presents new budget projections on Wednesday.