Italy will breach the EU’s 3 per cent deficit limit in 2020 and will come within a wafer of doing so next year, according to the European Commission’s latest economic forecasts.
Brussels expects the deficit to reach 2.9 per cent next year and 3.1 per cent in 2020.
It thinks the Italian economy will expand by only 1.2 per cent in 2019, whereas Rome has said its planned spending increases and tax cuts will help lift growth to 1.5 per cent.
By disputing the assumptions underpinning Rome’s calculations, Brussels will intensify a confrontation with the coalition government over its rule-busting budget plans. Brussels has given Rome until November 13 to resubmit its tax and spending proposals after concluding that they amounted to a “particularly serious breach” of the EU’s fiscal rules. Italy potentially faces a sanctions procedure and fines if it refuses to comply.
Rome last month said it would introduce a citizen’s income, reverse a rise in the pension age and cancel a planned increase in value-added tax. Together these measures would lift the deficit to 2.4 per cent in 2019, rather than the 1.8 per cent the previous government had agreed with Brussels.
The commission objects to Rome’s expansionary budget because it believes the higher deficit will make it impossible for Italy to meet its obligations to reduce its debt, which stands at 131 per cent of gross domestic product.
The commission said the outlook for Italian growth was “subject to high uncertainty and intensified downside risks”.
“A prolonged rise in sovereign yields would worsen banks’ funding conditions and further reduce credit supply, while public spending could crowd out private investment,” the commission said. “Envisaged policy measures might prove less effective, having a lower impact on growth. Uncertainty about government policies might affect sentiment and domestic demand. Finally, the planned rollback of structural reforms bodes ill for employment and potential growth.”
After robust growth of 2.4 per cent in 2017, the commission expects the eurozone to expand by 2.1 per cent this year and 1.9 per cent in 2019, with domestic consumption and investment offsetting global uncertainty.