Following mammoth negotiation sessions between the various parties to the coalition, the Italian government of Giuseppe Conte presented a draft 2019 budget on the evening of Thursday 27 September, anticipating a nominal deficit of 2.4% of GDP, which the European Commission considers a priori incompatible with the structural effort commitments made by Italy under the Stability and Growth Pact.
“It is a budget which […] today appears to lie outside our rules, which are common rules”, Pierre Moscovici, the Commissioner for Economic and Financial Affairs, told RMC/BFM TV on Friday 28 September (our translation).
Official reactions, however, have been fairly guarded, as the Italian government is not officially required to submit its draft 2019 budget to the Commission until mid-October.
“We anticipate that the draft budget will be presented by 15 October as for all Eurozone member states, as every year”, Alexander Winterstein, a spokesperson for the institution, told a press conference.
Although 2.4% is the nominal deficit put forward by the Italian authorities, in particular the two Deputy Prime Ministers, Matteo Salvini (League) and Luigi Di Maio (5 Star Movement), the structural efforts are more important in this scenario, as Italy is under procedures provided for by the preventive arm of the Pact.
More specifically, Rome is theoretically supposed to reduce its structural deficit by 0.6% of GDP in 2019, which is unlikely to be the case with a normal deficit of 2.4% of GDP. It is probable that the Italian structural deficit will increase, Moscovici confirmed.
The political line set at European level is one of encouraging the cleansing of public finances during times of growth, in order to build buffers to trigger economic stabilisers in the event of a down-turn in the economic situation.
With the Italian nominal deficit expected to stand at 1.7% of GDP in 2018, the previous government of Paolo Gentiloni predicted a nominal deficit of 0.8% of GDP for 2019.
Concerning possible sanctions, although these certainly exist in the event of breaches of the rules of the Pact, Moscovici stressed that this was not the “spirit”. After mid-October, the Commission could, amongst other options, issue an opinion rejecting the draft Italian budget.
Readers may recall that the structural deficit reduction objective is ultimately to reduce the government debt ratio, which is a particular issue in Italy, as it is expected to stand at 130.7% of GDP this year (see EUROPE 12014).
The measures being considered by the Conte government include: - a citizenship revenue of €780, available to Italians and foreign residents who have lived on Italian soil for 10 years or more; - an increase in minimum pensions and a reduction in the retirement age via the '100' quota (62 years of age and 38 years of contributions, 63 years of age and 37 years of contributions, etc.).
Situation not comparable to that of France
Di Maio cited the example of the French draft budget for 2019, which was presented on 24 September (see EUROPE 12102), to justify the projection of a nominal budget close to 3% of GDP for next year.
Moscovici stressed that the French budgetary situation was “not at all” comparable to the Italian one. Paris is planning to reduce its structural deficit for last year, although this is not enough with regard to the rules of the preventive arm of the Pact, unlike Rome. The French authorities stress that the French nominal deficit will automatically fall in 2020, when a tax credit measure (CICE) is converted into a reduction in payroll charges, a measure that has been valued at 0.9% of GDP. (Original version in French by Lucas Tripoteau)