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Prime Minister Giorgia Meloni’s government forecast on Wednesday that Italy’s fiscal deficit will rise to 5.3% of gross domestic product this year, higher than previously forecast, as controversial tax breaks Costs are ballooning, putting pressure on the country’s public finances.
The “Super Bonus” program provides Italians with a 110% home improvement tax credit to improve energy efficiency and upgrade the appearance of buildings, triggering a crazy home improvement craze and helping to promote the rapid recovery of the Italian economy from the new crown epidemic.
But the plan comes at a high cost to public finances, with Meloni estimating the total cost at around €140 billion. A fierce critic of super bonuses, she has moved to limit the program since taking office last year.
“The numbers speak for themselves,” Meloni told state television last week. “The €140bn funding gap – money taken away from the health system, education and pensions – is used to renovate second homes and even castles.”
Italy’s fiscal deficit target for this year is 4.5% of GDP, but this was raised to 5.3% in the fiscal framework approved by Meloni’s cabinet on Wednesday.
While acknowledging that the fiscal hole will be much larger this year, the government also raised the 2024 deficit target to 4.3% of GDP from the previous 3.7%.
The government also cut its economic growth forecast for this year and next, reflecting broader difficulties in other euro zone countries and rising borrowing costs after the European Central Bank raised interest rates.
Italy’s GDP growth rate this year is now expected to be 0.8%, compared with 1% previously.
The government lowered its GDP growth forecast for 2024 to 1.2% from the previous forecast of 1.5%.
The revisions to GDP growth and deficit forecasts are part of an update to the government’s financial framework set out in April and will form the backdrop for next year’s budget. Details will be announced next month.
Meloni’s three-party right-wing coalition faces a difficult balancing act as it attempts to draft a budget, trying to reassure global markets that it is maintaining fiscal discipline while starting to deliver on its election promise of tax cuts.
Italian Finance Minister Giancarlo Giorgetti lamented that the ECB’s latest rate hike will cost Italy – whose public debt-to-GDP ratio exceeds 142% – an additional €15 billion in interest costs.
But Giorgetti said rising costs for the super bonus program – launched by the previous coalition led by the populist Five Star Movement – were complicating the current government’s problems, leaving it with little fiscal space for other efforts. .
“When I think about super bonuses, I get a stomachache,” the minister told a business audience this month. “It paralyzes the economic space and leaves little room for other measures.”
Investors remain on alert to see how the government responds to the various pressures it faces.
This week, the difference between German and Italian bond yields – a key gauge of market sentiment towards Europe’s most indebted major economy – rose above 190 basis points for the first time since May.
Additional reporting by Giuliana Ricozzi in Rome
Svlook
