COVID-19 hits Italy’s finances: New deficit target set at 10.4% of GDP

Premier Giuseppe Conte reacts after he communicated the recent government initiatives to the deputies to cope with the COVID-19 pandemic in the Montecitorio hall in Rome, Italy, 21 April 2020. [EPA-EFE/MAURIZIO BRAMBATTI]

Italy is bracing for a major financial blow from the COVID-19 crisis. The government is now planning a budget deficit of 10.4% of gross domestic product this year and sees the public debt rising to 155.7% of GDP, according to a draft forecasting document.

The Economic and Financial Document (DEF), due to be approved by the cabinet on Friday, reflects the huge hit to the euro zone’s third largest economy from the coronavirus epidemic.

Last year’s budget deficit came in at 1.6% of GDP, its lowest level for 12 years, while the debt ratio of 134.8% was already the second highest in the euro zone after Greece.

The debt targeted for this year would be the highest in Italy’s post-war history. The last time Rome posted a double-digit deficit was in the early 1990s.

Italy has been one of the countries hardest hit by COVID-19, registering more than 25,000 deaths, the second highest toll in the world after that of the United States.

The draft document forecasts an economic contraction of 8.0% this year under an unchanged policy scenario.

This estimate does not include the impact of a stimulus package due to be approved by the government this month, so the growth contraction finally targeted may be somewhat smaller.

The package will be worth some €55 billion, the draft document said, confirming comments from government source earlier on Thursday.

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The new spending plan will boost funds to supplement the income of the self-employed and workers temporarily laid off, government officials have said. A compensation scheme will help small and very small companies whose turnover has been hit by a government-imposed lockdown to contain the virus epidemic.

The draft estimates that GDP declined by 5.5% in the first quarter from the previous three months, and that this will be followed by a 10.5% drop in the second quarter.

It sees a rebound of 9.6% in the third quarter and growth of 3.8% in the last three months of the year.

Given the high degree of uncertainty, the Treasury also drew up a worst-case scenario involving a slower recovery in the second half of the year, yielding a full-year GDP contraction of 10.6% and 2021 growth of just 2.3%.

Its baseline scenario “assumes that a large-scale vaccine for COVID-19 has been developed by the first quarter of next year which will favour a further recovery of economic activity.”

On public finances, the budget deficit is seen falling to 5.7% of GDP next year, while the debt is targeted to decline to 152.7%.

Italy had pencilled in an automatic increase in sales tax due to kick in next January, but the draft spells out that this hike will be scrapped and not be replaced by alternative levies or spending cuts.

Instead, the government will simply forego the revenues from the tax hike, preferring to allow a higher deficit rather than risk hurting an already weakened economy.

The draft forecasts that growth will partially rebound next year, with GDP rising 4.7% under an unchanged policy scenario.

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