Although exiting the euro is no longer on the cards, the government’s programme lists several election promises (a flat tax, the citizens’ income, and expensive pension reforms) entailing costs (approximately 6% of GDP) that will significantly swell the budget deficit (2.3% of GDP in 2017, see Figure 4).
Given the country’s already high debt-to-GDP ratio (132% in 2017) the government’s room for fiscal manoeuvre is extremely limited. Implementing the new programme, even partially, could call the sustainability of Italy’s overall debt burden into question and the possibility of a deterioration in the situation cannot be ruled out.
The new government’s first serious test comes on 27 September when it is set to publish and present its stability programme to the Italian parliament, complete with the latest economic and budget forecasts.
The government is currently focusing its communication on complying with the 3% ceiling. But the preventive arm of the Stability and Growth Pact calls for bigger efforts, without which tensions with Europe could arise.
The budget preparations caused tensions between Giovanni Tria, the Finance Minister and supporter of fiscal rectitude, and the M5S party. Further strain appeared within the coalition, as the two ruling parties hold divergent budget priorities.
The nation’s political situation remains fragile and it is highly unlikely that the 2019 budget will fully clarify uncertainties surrounding Italy’s public finances, not least given the busy calendar of events ahead of the May 2019 European elections (see Figure 5).
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