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Italy’s budget to be examined by the EU, government optimistic on flexibility

by Dino Pesole

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The new macroeconomic forecasts are expected on Thursday, followed by the final verdict on the Stability Law, due around November 23, with an extraordinary meeting of the Eurogroup, which will draw its conclusions based on the document of the European Commission expected for November 18-19.

As the Parliament looks into the budget, the new European calendar is also in the works.
Between the Chigi Palace and the Economy Ministry, optimism prevails: the position of the President of the European Commission, Jean-Claude Juncker, is to grant Italy all the flexibility it asked for.

In addition to the 0.4% margin authorized in May (for €6.5 billion), a further 0.1% (€1.5 billion) will be granted for the clause for reforms, and 0.3% (€4.8 billion) for the investment clause.

Little changes cannot be ruled out as the ministers discuss the budget, but so far, the €3.3 billion-worth migrant clause is on the list. Total relief for 2016 amounts to over €16 billion.

The “discount” will allow the government to increase deficit to 2.4% of GDP from 1.8% forecast in September. The “expansive” budget for next year will therefore benefit from the lower regional labor tax IRES, that will be brought forward to next year, and which is conditional to the green light from Brussels to the migrant clause.

This is no small support for a budget that bets on growth, with a GDP growth of around 1.6%, provided that the resources introduced in the draft budget under review in the Senate pass the parliamentary test.

The most important issue is public expenditure, which, thanks to structural cuts (a spending review for €5.9 billion) and further efficiency measures, is worth €7.9 billion, and which will necessarily need to increase in 2017 to avoid the safeguard clauses, currently defused only in 2016 for €16.8 billion (other clauses remain worth €33.3 billion, €13.9 billion of which in 2017 and €19.3 billion in 2018) and fund additional tax cuts already planned (IRES and IRPEF).

The spending review has for now missed expectations, and will probably need to be rebalanced, if the experts of the lower house and the Senate are right when they say that effective savings asked from the Regions in the 2017-2019 period amount to €17 billion.

The advice is to consider “the effective feasibility of the budget.” Brussels will likely not go into such detail, although it could renew its call to implement more consistent structural cuts, in order to ensure the full sustainability of public accounts.

The Commission will also call on the government to respect the “debt rule,” crucial when a country asks Brussels and its European partners to postpone the balanced budget target until 2018.

Debt is currently at 132.3% of GDP. The government will use €3.4 billion expected from the partial privatization of Poste Italiane to meet in the current year the target of 0.4% of GDP (€6-7 billion).

In 2016-2018, total proceeds from disposals are estimated at 1.5% of GDP (around €25 billion). A crucial step to ensure the respect of the debt rule will be the primary surplus indicated in the budgetary plans at an average 3% in 2015-2019, but especially growth, in order to reduce debt to 119.8% in 2019, provided that inflation rises to around 2%.