Italy's Parliament has granted final approval to Giorgia Meloni's budget for the upcoming year, bringing a much-needed victory for the government following a series of coalition disagreements over financial policies. The Lower House passed the budget law with an overwhelming majority, endorsing a delicate balancing act that fulfills some electoral promises while ensuring control over the country's deficit.
The resounding approval demonstrates unity within Meloni's three-party coalition, putting an end to days of tension caused by the Parliament's decision not to ratify the reform of an EU bailout fund and the extension of a controversial tax-credit scheme for home renovations.
One of the key highlights of the approved budget is the reduction of taxes on wages and the simplification of income brackets subject to taxation. Additionally, contracts for state employees will be renewed, addressing concerns over job security.
As Italy enters 2024, Meloni's government can breathe a sigh of relief, as the threat of a potential downgrade to junk status has been averted. The spread between German and Italian bond yields, a crucial indicator of risk within the eurozone, is at its lowest level since Meloni assumed office.
Throughout the budgeting process, Italy managed to evade criticism from the European Commission despite adopting a more relaxed fiscal stance. However, due to increased expenditure, the country's deficit as a percentage of GDP will not meet the European Union's limit until 2026, a year later than initially planned.
This approach underscores Meloni's determination to fulfill campaign promises, even in the face of lower-than-expected economic growth. In contrast, her 2022 budget benefitted from a €9 billion ($9.9 billion) windfall due to the strong performance of the economy under her predecessor, Mario Draghi.
Amidst close scrutiny of Italy's public finances, the risk of losing its investment-grade status loomed large. However, Moody's Investors Service removed the negative outlook, averting such a downgrade. Nevertheless, competitors maintained their higher ratings.
With the budget's successful approval, the government now has some leeway to move forward with its economic agenda and assist Meloni in consolidating her power within the fractious governing coalition.
However, challenges may arise in the future as new EU fiscal rules come into effect. These rules, agreed upon earlier this month, will be enforced once the pandemic-era suspension of the Stability and Growth Pact expires in 2024. According to the new criteria, countries with a debt-to-GDP ratio over 90% must reduce it by 1 percentage point during an adjustment period. Italy's current ratio stands at around 140%, and with a sluggish economy coupled with rising debt-servicing costs, achieving this reduction may prove to be challenging.
Nonetheless, Finance Minister Giancarlo Giorgetti stated earlier this week that Italy does not need to alter its budget plans for the upcoming year to comply with the new rules. This ensures that the government can continue working towards its economic objectives without immediate disruptions.