The general government budget deficit is projected to rise from 1.8% of GDP in 2018 to 2.5% in 2019. For 2019, the government plans to enact an expansionary budget with net new measures amounting to 1.2% of GDP, mostly consisting of higher spending. The main measures include repealing the planned VAT hike, lowering the retirement age, introducing a guaranteed minimum income targeting the poor, and increasing public investment. These expansionary policies will be offset only partly by spending cuts and various revenue‑raising measures imposed on banks and corporations. Overall, according to the Draft Budgetary Plan, taxes on business income (excluding taxes on banks) will rise by 0.1% of GDP. The OECD projections assume that the government will take additional measures, as planned, to contain the deficit if output growth in 2019 turns out to be below the government’s projections. The budget deficit is projected to rise further to 2.8% of GDP in 2020, assuming no major changes in policies and no VAT hike.
The budget rightly aims to help the poor but given its composition, the growth benefits are likely to be modest, especially in the medium term. The guaranteed minimum income greatly strengthens anti‑poverty programmes but to be effective and contain costs the government needs to accelerate the reforms to enhance job‑search and training programmes, as well as social inclusion policies. Building on the work already done by many municipalities in the context of the new anti‑poverty programme (Inclusive Income Scheme, REI) rolled out in early 2018 would deliver better and faster results. The reduction in the retirement age will worsen inter‑generational inequality by increasing already high pension spending and will lower growth in the long run by reducing the working age population. The increase in business income taxation will more than offset the small positive effect of the limited extension of the simplified tax regime (i.e. flat tax) for the self‑employed and micro‑enterprises. Given slow growth, rising interest costs and a larger deficit, the public debt ratio will cease to decline and remain at nearly 130% of GDP on a Maastricht basis.
Economic and social reforms and a prudent fiscal policy must continue if Italy is to enhance social cohesion and boost growth. Without sustainable fiscal policy, the room for the public sector to provide benefits and help the poor will inevitably narrow. Gradually raising the primary budget surplus and boosting growth is key for a durable reduction of the public debt‑to‑GDP ratio.
Targeted and well‑funded anti‑poverty programmes require effective job‑search and training policies to encourage participation in the formal labour market and reduce social exclusion. Reforms to increase competition in sectors where entry is still restricted, such as many local public services, would increase business dynamism and provide better services to users. A permanent cut in social security contributions would encourage firms to hire new workers. Strengthening the agency responsible for coordinating active labour market policies across regions (ANPAL) is key to boosting job growth. Improving public administration efficiency – by using digital technologies more extensively and enhancing human resource management – at central and local levels would enhance and equalise the provision of basic public goods and services across the country and increase trust in public institutions. Improving the effectiveness of the public administration is also crucial to accelerate infrastructure projects and strengthen the effectiveness of regional development policies. Simplifying the public procurement code would accelerate public investment and need not undermine measures to fight and prevent corruption. The role and power of the anti‑corruption authority (ANAC) should be protected.
