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jueves 2 febrero, 2017 12:44
   BLOG, Economía, Finanzas, Gobernanza

Rome tells Brussels it will make budget correction

by Marco Rogari and Gianni Trovati

Italy’s government said on Wednesday it will adjust its 2017 budget targets to reduce its deficit as requested by the EU, but as part of a long-term strategy that must go “well beyond €1 billion” of additional extraordinary expenditure for the earthquake.

In this scenario, the most important challenge will be tax revenues, which will account for three quarters of fiscal adjustment without increasing the value-added tax, but focusing on reducing (the VAT) tax evasion and possibly increasing the excise duties.

The remainder of the adjustment will come from spending cuts, 90% of which through a new spending review and 10% through lower tax expenditures.

Rome is essentially opening the door to a revision of its budgetary targets but as part of plans that will accompany the release of the next budget blueprint (DEF) in April: and with the opportunity of spending more for the earthquake-hit areas.

An immediate correction would instead hurt the still-weak economic growth. Last night, the Economy Ministry released the letter sent to the European Commission in response to a request from Brussels two weeks ago of an additional 0.2% of fiscal adjustment.

The letter signed by Economy Minister Pier Carlo Padoan accompanies an 86-page report about “relevant factors” which, according to Italy, would justify what “at a first look” appears as a deviation from the debt rule. A deviation that Rome essentially denies.

Among the relevant factors are flat inflation, which last year turned into deflation (from 0.1%), and high market volatility, which has weighed on planned privatizations that would reduce debt.

In the future, new risks may come from the US protectionist policy of President Donald Trump a possible tax competition with Great Britain after its exit from the EU. Additional expenditure for the earthquake are part of the factors.

The letter also addressed the eternal issue of the output gap, or the difference between potential and effective growth, which according to the government is larger than 0.8% of GDP estimated in the EU.

Having said that, Rome does not close the door to a possible adjustment, although it does not present a detailed calendar as sought by Brussels. The uncertainty, according to the government, also depends on the final 2016 GDP reading, which will be released at the end of the month and could be higher than 0.8% targeted in the updated DEF (the parliamentary budget office forecasts 0.9%)

The need to preserve the still-weak recovery is the main argument used by Italy to plan a series of measures in the medium term. A growth-friendly economic policy needs possible solutions. In terms of revenues, the government has high expectations for measures to counter VAT evasion which, although the letter doesn’t say it, could include an extension of the reverse change.

A little increase in excise duties cannot be ruled out, but the decision will depend on the effective earthquake expenditure. Given the politically delicate issue, the contribution is not expected to be very high. Most (90%) will have to come from a new spending review plan.


By Marco Rogari and Gianni Trovati | italy24.ilsole24ore.com

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