Italian Ministry of Finance released the updated macroeconomic and fiscal projections. The report (“Nota di Aggiornamento del Documento di Economia e Finanza”, NADEF) includes both the scenario under the current legislation (the one presented in April 2017) and the revised one with the new budget targets. The projections included in the NAFED forms the basis for the budget law to be submitted to Brussels by October 15 and to be approved by year-end.
Italy’s updated budget projections show further back-loading of fiscal consolidation
Highlights:
- Last Saturday, the Italian government presented the updated macroeconomic and fiscal forecasts, which will be at the basis of the 2018 budget law.
- Compared to the last April figures, the planned fiscal consolidation was reduced in size (structural primary balance to improve only by 0.7 pp in 2018-2020 vs 1.4 pp before) and postponed further (no major consolidation before 2019). Growth figures were revised upwards (+1.5% in 2017-2019, +1.3% in 2020).
- The back-loading of fiscal consolidation, while supporting growth in the short-term, will delay the decline in the debt-to-GDP trajectory. We expect the ratio to fall from 132.0% in 2016 to 127.9% in 2020, 4 pp above government’s forecasts.
- While the short-term prospects for debt sustainability remain rather benign, a failure to increase the structural primary balance from 2017 levels (2.2% of GDP based on our estimate of the output gap) would materially increase the probability of explosive debt trajectories over the longer-run.
- The importance of a gradual fiscal consolidation is even more evident when considering the much less favorable outlook for pension expenditure following the revised demographic projections by ISTAT. Absent any reform, the increased pension deficit would add more than 60 pp to the debt-to-GDP ratio by 2060.
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