The EU “postpones” the maneuver of Italy and eight other countries: “Not in line. Rome must be ready for new measures”

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By John

A higher net primary expenditure in 2023 than forecast (despite the Italian estimates for 2024 being below the required threshold); the failure to use the savings from the elimination of support for energy (1% of GDP) to reduce the deficit and the limited scope of the effects of the cut in taxation on labour: these are the elements that led the European Commission judges Italy’s budgetary plan to be “not fully in line with the Council recommendation of 14 July 2023”.

The European executive therefore invites Italy to «stand ready to adopt the necessary measures within the national budget process to ensure that fiscal policy in 2024 is in line with the recommendation».

Italy is part of the group of nine “postponed” eurozone countries, together with Austria, Germany, Luxembourg, Latvia, Malta, the Netherlands, Portugal and Slovakia. However, Belgium, Finland, France and Croatia risk not being in line. Seven were promoted: Cyprus, Estonia, Greece, Spain, Ireland, Slovenia and Lithuania.
Returning to Italy, the Commission – in its autumn package – writes that growth in nationally financed net primary expenditure should respect the recommended maximum growth rate in 2024. However, if net expenditure in 2023 had been the same predicted at the time of the recommendation, the resulting growth rate of net spending in 2024 would be higher than recommended.

In detail, on 14 July the Council recommended that Italy guarantee a prudent budget policy, in particular by limiting the nominal increase in net primary expenditure financed at national level in 2024 to no more than 1.3%. According to the Commission’s 2023 autumn forecast, Italy’s net primary expenditure is expected to increase by 0.9% in 2024, a rate lower than the recommended maximum.

However – explain the Brussels technicians – the current estimates of net primary expenditure financed at national level in 2023 are higher than what was expected at the time of the recommendation (by 0.8% of GDP).

This is mainly due to two factors regarding the Superbonus tax credits: the Commission’s 2023 autumn forecast revised upwards their impact on the 2023 deficit following a higher-than-expected uptake and reflecting information contained in the Budget planning document; and to legislative interventions that change the nature of tax credits, implying that they have no expected impact on 2024 spending. In essence, the debt burden was offloaded to 2023, relieving the 2024 accounts, also thanks to the interpretation provided by Eurostat on payable credits.

«Overall, the Commission is of the opinion that Italy’s updated Draft Budgetary Plan is not fully in line with the Council recommendation of 14 July 2023. The Commission therefore calls on Italy to stand ready to take the necessary measures in within the national budget process to ensure that fiscal policy in 2024 is in line with the Council recommendation of 14 July 2023″, writes the European executive in black and white.

Furthermore, the Commission projects that Italy’s nominal budget deficit will be at 4.4% of GDP in 2024, above the treaty reference value of 3% of GDP, and the public debt-to-GDP ratio at 140.6% of GDP in 2024, above the treaty reference value of 60% of GDP but 6.5 percentage points below the end-2021 ratio. This makes the Italy is one of the countries at risk of infringement proceedings for excessive deficit.

Finally, the Commission considers that Italy has made limited progress regarding the structural elements of the budgetary recommendations issued by the Council on 14 July 2023 and therefore calls on the Italian authorities to accelerate progress.

«Since the recommendation for 2024 was formulated as a growth rate, the conformity assessment also takes into account the base effect starting from 2023. If net spending in 2023 was the same as expected at the time of the recommendation, the resulting growth rate of net spending in 2024 would be higher than the recommended growth rate of 0.6% of GDP. Therefore, it is considered that nationally financed net primary expenditure is not fully in line with the recommendation”, highlights Brussels.
Another element on which the Commission’s judgment focuses concerns the savings from the elimination of subsidies against high energy costs which, however, were not used to reduce the deficit, as Brussels would have liked.

According to the Commission’s forecasts, taking into account the information contained in the Dpb, the measures adopted to mitigate the economic and social impact of the increase in energy prices should be mitigated by the end of 2023, with a deficit reduction impact in 2024 of 1% of GDP. “However, the related savings are not expected to be fully used to reduce the government deficit,” the recommendations read.

«At the same time, the budget includes several new and extended revenue and expenditure measures for 2024 that are not directly related to the evolution of energy prices. These include, on the revenue side, the extension to 2024 of cuts in social security contributions for those on low and middle incomes; a tax break for businesses that hire employees on a permanent basis; and a first step of the general tax reform that merges the first and second income tax brackets, increases the tax exemption area and reviews tax deductions on high incomes.

Regarding expenditure, the draft budget includes additional funds for the renewal of public salary contracts 2022-2024 (including for the healthcare sector), the extension until 2024 of some early retirement schemes (with some modifications), measures to support the birth rate and additional funds for the health sector, local authorities and areas affected by floods in May 2023. These measures are partly offset by spending savings along with a limited review of government spending, as well as some small revenue-raising measures.

The aggregate cost of these measures is estimated by the Commission at 0.7% of GDP in 2024 and most of them are expected to have a permanent effect.”
For the Commission, «these interventions, including the review of tax deductions, are rather limited in scope and do not address the erosion of the tax base, further reduced last year with the extension of flat-rate schemes for self-employed workers». For the European executive, Italy should also continue to guarantee the effective absorption of Recovery subsidies and other EU funds.