The business cycle

ITALY: Budget update

By September 28, 2018 No Comments

Last night it was announced to the press that there is a political agreement to raise the 2019 budget deficit to 2.4% of GDP instead of the 1.6% of GDP that guided by the MOF Tria a few days ago.

According to the press statement from the Cabinet meeting, the Budget will include the following:

  • No VAT rate increase next year, as widely anticipated
  • The “citizen minimum income” will be introduced next year in the form of a min pension of EUR780 and some form of minimum income linked to job search
  • Measures to support early retirement to favour youth employment
  • Introduction of the flat tax by increasing the threshold for the simplified tax scheme for SMEs and professionals AND via a reduction in the corporate income tax for companies that reinvest earnings and add employment
  • Strengthening administrative and professional skills at the local government level, an increase in financing resources for public investment and simplified decision making process in the public administration to support the quantity and quality of public investment
  • Additional resources to compensate savers that have lost money during the bankruptcy process of banks
  • Extra maintenance investment for motorways

Point (5) looks like a positive welcome, as for growth a huge practical problem is due to the almost nonexistent professional capabilities of the small towns, which results in very low ability to absorb EU funds and ineffective public investment spending.
All in all –our view is that a higher deficit goal than what guided originally isn’t a major cause for concern for debt sustainability and according to our models it is consistent with fair value for the 10yr BTP at around 2.8-3%. The latest sentiment surveys for Italy signal a modest deceleration consistent with what seen in the euro area overall, but on the margin the performance of Italy was slightly better than the rest of core euro zone in September.

Introducing the flat tax and the minimum income plan was the relatively “easy part”, because the budget constrains imply the resources allocated to these changes are minor, but still there will be a positive impact on the electorate.