The DEF 2014 avoids a head-on clash with the European authorities, containing deviations from fiscal objectives and betting heavily on the effects of the reforms. A more robust recovery, and the success of the spending review, will be crucial in achieving medium term objectives….
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– The Documento di Economia e Finanza (DEF) approved on Tuesday 8 April by the Italian government is designed to avoid a head-on clash with the European Commission. The picture drawn by the plan envisages a structural improvement both in 2014 (from -0.8 to -0.6% of GDP) and in 2015 (to -0.1%), albeit at a slower pace compared to the old plan, and stresses the intention to stoke the structural reform process. The target for the 2014 deficit is raised from -2.5 to -2.6%, in line with the European Commission’s estimates under current legislation. However, there will be some controversy: the structural improvement is modest, considering the high level of debt, and a balanced budget will only be fully achieved in 2016.
The primary balance is projected to rise back this year from 2.2 to 2.6% of GDP, a trend that should strengthen over the following years of the recovery. Interest expenditure is on the decline, as the increase in debt is more than balanced by the plunge in the cost of refinancing.
– The related assumptions are rather cautious. The government expects GDP growth to accelerate in both real and nominal terms at a faster pace than our estimate of 0.2-0.3 per cent. The difference in 2014, however, depends in part on the fact that our projection (0.5%) does not include the effects of the emergency budget and of the reforms, factored in by the government. In any case our next revision will probably be marginal, as we do not expect the reforms, both implemented and announced, to produce significant effects on GDP in the short term. The difference is modest, however, and implies a lower estimate of the primary balance on our part by only 1-2 tenths, all other conditions being equal. We will publish a more in-depth analysis next week.
– On the fiscal front, anticipations on the funding for the tax cuts announced in March, mostly transitory in nature for the time being, have been essentially confirmed. The funding of the cuts of the income tax (IRPEF), estimated at 6.7 billion in 2014 and 10 billion in full swing, will initially be achieved through spending cuts worth 4.5 billion euros, higher VAT revenues deriving from the further repayment of arrears owed by the public administration (for which additional appropriations of 13 billion euros are planned), and the DEF’s biggest surprise, i.e. the increase in the tax on the capital gains cashed in by banks with the increase in the value of the shares held in the Bank of Italy. There is the risk that the funding measures may prove to be insufficient, but interest outlays may still offer a margin. However, the fiscal plan already includes a much higher state sector borrowing requirement (around 76 billion) than announced in September 2013, owing to the payment of more commercial debts.
– Structural spending cuts will be crucial for the stabilisation of coverage and the achievement of 2015-16 objectives: 17 billion euros in savings are expected in 2015, and 31 billion euros in 2016. If over the next two years the size of the cuts will represent a big challenge, major efforts will have to be made in 2014 to raise the targeted amounts in the eight months or so that remain until the end of the fiscal year. Initial indications point to a reduction in transfers to companies, interventions on health care spending items that significantly exceed standard costs, and a number of measures of greater media impact than substance, such as the ceiling placed on the wages of public sector top managers. On the whole, the redistributive mix of the measures seems moderately supportive for growth.
– Estimates of annual proceeds from privatisations have been raised to 0.7% of GDP in the 2014-17 period, from 0.5% as estimated in the DEF update of 2013. The relaunching of the programme was needed to comply with the debt rule, but will not immediately reverse the rising trend of debt. As had been obvious for some time, the reduction of the debt/GDP ratio is postponed to 2015: an increase is now forecast for 2014 from 132.6 to 134.9%. For a major reduction to be achieved, an extended period of economic expansion will be necessary, with low interest rates, and large primary surpluses.
Appendix
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