The Italian government told the European Commission that it will review its budget both on the spending and the revenue side to avert a standoff over the country’s mounting debt-to-GDP ratio.
The European Commission recently issued a stern warning to the Italian government and expressed doubt over its ability to keep the budget on track. Meanwhile, Deputy Prime Minister Matteo Salvini is making the case for tax cuts to achieve a so-called “fiscal shock” that would boost growth to increase revenue.
Meeting the Commission’s deadline to respond, Italian Economy Minister Giovanni Tria wrote to Brussels on 31 May and offered his reassurances that Italy is reviewing its 2020 budget in view of the latest macroeconomic projections.
“We recognise that in principle a higher primary surplus would be necessary in order to put the debt ratio on a clear downward path,” Tria wrote.
“I wish to reiterate that the 2020 budget will be Stability and Growth Pact compliant,” Tria added.
Tria, however, made clear that the government is reluctant to introduce immediate austerity measures given the drop in global trade and manufacturing activity, continuing high unemployment, and near-deflationary conditions.
The Commission expects Ithe Italian debt to rise from 133.7% of GDP in 2019 to 135% per cent in 2020. Italy’s national debt rose from 131.4% of GDP in 2017 to 132.2% in 2018.
Under the EU’s rules, Italy is required to shrink the deficit by 0.6% of gross domestic product every year until it is in balance. Instead, it has been rising every year since 2015. Under European law, the Commission is obliged to warn each of the bloc’s members to keep the deficit below 3% of GDP.
Should the Italian government fail to convince Brussels that its public debt is back on a downward trajectory, the Commission could ultimately introduce financial sanctions, although no country in the Eurozone has yet been fined for breaking budgetary rules.