Italy cut its 2019 budget deficit target on Monday by €7,6bn lower than the previous forecast, which corresponds to roughly 0,4% of GDP. The new headline target should bring the deficit to 2,04%, as originally agreed upon with the European Commission, rather than the revised 2,4% Rome projected in April.
The new budget savings are not founded on cost-cutting measures but on the fact that two major spending measures – early retirement and universal income – have thus far cost less than originally anticipated. In addition, the government has also frozen a number of early retirements, achieving savings to the tune of €1.5bn.
According to the Treasury, the Italian budget is now “in compliance with the rules of the Stability and Growth Pact.”
Brussels has yet to validate that assessment but Rome hopes that this last-minute move will avert an escalation of the standoff over budgetary policy with Brussels. The European Commission has threatened to trigger the Excessive Deficit Procedure (EDP) as Giuseppe Conte’s government failed to reign over public debt in 2018, which currently stands at 132% of GDP.
“I have complete faith that [EDP} can be avoided,” Mr Conte said in Brussels on Monday.
President Sergio Mattarella echoed the Italian government’s view on Monday, suggesting that the country’s main economic indicators are positive, budgetary policy on track and, therefore, there is “no reason to open a disciplinary procedure against Italy.”
The crisis may be less acute but the standoff over Italian budgetary policy is likely to persist. Both the Five-Star Movement (MS5) and the League are committed to tax cuts, which could further derail deficit targets.
Any decision to move on the EDP process against Italy would have to be approved by the Eurogroup next week. Any further delay could mean the decision could be postponed for autumn, giving Rome further room for negotiation. In any event, Italian bonds rallied on Monday, as investors grew more confident that Italy can avoid punitive measures.