Italian Premier Giorgia Meloni’s government needs to tread carefully when it comes to spending to avoid increasing borrowing costs and compromising its already fragile financial situation, a Bank of Italy official said.
(Bloomberg) — Italian Premier Giorgia Meloni’s government needs to tread carefully when it comes to spending to avoid increasing borrowing costs and compromising its already fragile financial situation, a Bank of Italy official said.
“In such a fragile context it’s important that fiscal policy be managed with extreme prudence,” the head of the Bank of Italy’s Economics and Statistics Department Sergio Nicoletti Altimari said Monday during a parliamentary hearing. “Choices that are perceived as not fully in line with the goal of sustainable public accounts could worsen financing conditions.”
Last month Italy presented a budget update that shows the government plans to bring its deficit below the limit set by the European Union only in 2026 — a year later than previously planned. That means Italy will have a deficit-to-GDP ratio of 5.3% this year and 4.3% next, allowing Meloni to cut taxes on wages and keep other promises to voters.
The new government forecasts also include lower growth and debt stuck at 140% of gross domestic product in 2023 and 2024.
That’s a prospect that also worries Bank of Italy’s Altimari.
“The high debt-to-GDP ratio is a serious element of vulnerability,” he said. “It reduces fiscal space to face possible future negative shocks, exposes the country to the risk of financial-market tensions, and raises the cost of debt for the state, and ultimately for families and companies.”
The government’s new fiscal plan underscores the challenge Meloni faces in balancing tax-cut promises and a souring economy. Italy is not the only euro nation struggling to meet EU fiscal rules. France will have a deficit of 4.7% this year and Spain of 4.1%, according to forecasts compiled by Bloomberg.
Altimari concluded his presentation to lawmakers saying that overall the macroeconomic picture presented in the budget “is plausible though slightly optimistic” and that the only real solution to the country’s problems is to boost economic growth through structural reforms and investments.
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