Italy cuts growth forecast as government meets on budget

Rome: Italy will cut this year’s growth forecast to 0.8% from a previous 1% when the government meets on Wednesday to set the framework for next year’s budget, a minister said, as Rome grapples with a faltering economy and rising fiscal deficit.

Prime Minister Giorgia Meloni faces a tough task to deliver promised tax cuts in the budget, to be presented next month, without upsetting financial markets that are keeping a keen eye on Rome’s creaking public finances.

The closely watched yield gap between Italian and German 10-year bonds – a gauge of market sentiment towards highly indebted Italy – rose on Wednesday to 1.94% (194 basis points), its highest since May 5, before easing back slightly.

The yield on Italy’s 6-month BOT bills rose at auction to its highest since 2011, when Italy was embroiled in a sovereign debt crisis.

The cabinet will meet at 1630 GMT to sign off on the Treasury’s new forecasts which, three sources familiar with the matter said, will reflect growing economic difficulties after a slew of weak data.

“We have had to lower this year’s growth forecast to 0.8% and also reduce the forecast for next year,” Industry Minister Adolfo Urso told reporters at a Rome event ahead of the cabinet meeting.

In 2024, gross domestic product in the euro zone’s third largest economy is seen rising 1.0% under an unchanged policy scenario, the sources said, down from a previous 1.5%.

However, the final growth target for next year will be 1.2% or 1.3%, the sources said, thanks to tax cuts for low and middle-income earners and other expansionary measures Meloni plans to include in the budget bill.

This year’s fiscal deficit target is now expected to be in the region of 5.5% of GDP, up from a previous 4.5%, while in 2024 it is seen at between 4.1% and 4.3%, up from 3.7%.

“The debate around the Italian budget will stoke volatility in Italian sovereign debt also because negotiations on the new European fiscal rules are entering a crucial stage,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.

Meloni’s room for manoeuvre has been reduced by costly green building incentives, which were introduced before she took office last year but are still weighing on public accounts.

These incentives, in the form of tax credits, helped boost a strong growth rebound in 2021 and 2022 after the COVID-19 pandemic, but they have proved a heavy burden for state coffers, costing some 54 billion euros ($57.07 billion), or 2.8% of GDP, last year alone.

Despite these problems, next year’s deficit is still seen below 4% of GDP under current trends, according to the sources, allowing Meloni leeway of several billion euros to fund budget measures while keeping the deficit inside the new target.