Italy raises budget deficit forecast amid mounting economic pressures

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The Italian government has set its fiscal deficit for this year to 5.3 per cent of economic output, up from an earlier target of 4.5 per cent, as ballooning costs from a controversial “Superbonus” tax incentive scheme weigh on the country’s public finances.

Prime Minister Giorgia Meloni’s government on Wednesday also said it expected next year’s deficit to be larger than expected, 4.3 per cent of gross domestic product, up from the 3.7 per cent target it set in April.

Finance minister Giancarlo Giorgetti said the increase in next year’s deficit target would allow Rome to fund measures to support low-income households, incentivise families to have more children and raise public sector wages amid an economic slowdown.

But such expansionary spending could lead to tensions with Brussels because it moves Italy further from EU rules that cap budget deficits at 3 per cent of GDP.

The rules were suspended during the Covid-19 pandemic to give countries fiscal space to respond to the shock but are due to go into force again next year. Some other countries have already announced spending cuts to reach that target.

The Italian government is projecting it will bring its deficit below 3 per cent in 2026.

However, Giorgetti said he believed officials at the European Commission — which must approve the Italian budget due to be put forward next month — will be sympathetic to the pressures on Rome. Other EU members, including France, are also targeting wider deficits next year than technically allowed.

“Certainly they will understand the situation, as do many colleagues — European finance ministers who are dealing with an economic slowdown, or in some cases recession,” he said. “The approach is one of responsibility and prudence.”

Italy’s 10-year bond yield rose 2 basis points to 4.8 per cent on Thursday morning, close to an 11-year high. The spread over the German equivalent increased slightly to 195bp, after Germany’s 10-year bond yield was up 1.3bp on Thursday.

Italy’s government also pared its economic growth forecasts for this year and next, reflecting wider woes of other eurozone nations and the higher cost of borrowing following interest rate increases by the European Central Bank.

It now estimates that Italy’s GDP growth will be 0.8 per cent this year, compared with 1 per cent previously. The government cut its 2024 GDP growth forecast to 1.2 per cent from 1.5 per cent.

In trying to draft the 2024 budget, Meloni’s three-party, rightwing coalition faces a tough balancing act, seeking to reassure global markets that it is maintaining fiscal discipline while starting to fulfil its electoral promises to cut taxes.

Giorgetti has lamented that the ECB’s recent rate rises will cost Italy — which has a public debt-to-GDP ratio of more than 142 per cent — an additional €15bn in interest costs.

But it is the rising expense of the Superbonus scheme — started by a previous coalition led by the populist Five Star Movement — that has seriously complicated matters for Meloni’s government.

The scheme — which offered Italians a 110 per cent tax credit for house renovations to enhance energy efficiency and upgrade building exteriors — triggered a frenzied national home improvement boom that helped drive a rapid economic rebound from the Covid shock.

But the program has come at a soaring cost to the public exchequer, with Meloni estimating the total bill at about €140bn. A fierce critic of the Superbonus, she has moved to restrict the scheme since taking office last year.

“The numbers speak for themselves,” Meloni told state television last week. “A €140bn hole — money taken away from the health system, education and pensions — to renovate second homes and even castles.”

Giorgetti told a business audience this month that the scheme had left the government little room to manouever. “When I think of the Superbonus, I get a stomach ache,” he said.

Additional reporting by Martin Arnold in Frankfurt