Italy greenlights plan to cut deficit by €3.4 bn

""Our forecasts are cautious," said Italian Prime Minister Paolo Gentiloni. [Camera dei Deputati/Flickr]

Italy’s debt-burdened government approved a package of economic reforms Tuesday (11 April) designed to cut €3.4 billion from its deficit this year, Prime Minister Paolo Gentiloni said, following pressure from Brussels.

The cut is equivalent to 0.2% of GDP and will include measures to fight tax evasion and reduce public spending, though there will be no tax increases, Gentiloni said after a cabinet meeting.

Rome also adjusted its 2017 targets to seek growth of 1.1%, up from 1.0% previously, following growth in 2016 of 0.9%.

The European Commission had in mid-January written a letter to Rome demanding that it go back to its 2017 budget and shave off €3.4 billion ($3.6 billion) under the threat of penalties.

Brussels tells Italy to reduce fiscal gap or risk being fined

The European Commission warned Italy on Wednesday (22 February) it risked disciplinary action if it did not adopt promised measures to cut its deficit, adding to pressure on a government facing possible early elections and rising euro-sceptic sentiment.

The 2017 Italian budget adopted last autumn had forecast a deficit of 2.3% of GDP — significantly higher than the 1.8 percent initially demanded by Brussels.

“The deficit-to-GDP ratio will be reduced to 2.1% this year,” Gentiloni pledged.

“Our forecasts are cautious and it has often turned out in recent years that they are corrected positively afterwards.”

Italy has the second highest public debt of any EU country, equivalent to 133% of its GDP in 2016.

It was one of eight eurozone countries warned in November that they could face fines and restricted access to funds from Brussels over their failure to stick to the EU’s Stability and Growth Pact rules.

Italy and Spain: A tale of two deficits

While Italy has opted for a confrontational approach to clinch budget spending leeway from the European Commission, Spain is hoping that better-than-expected growth will placate EU demands.

In the first quarter of the year, the deficit was running at €29.0 billion, around 2.65 billion higher than the deficit registered for the same period of 2016, it said in a statement.

The state sector borrowing requirement (SSBR), a measure of the gap between central government spending and income, differs from the broader “general government” accounts, which the European Union Stability and Growth Pact refers to when assessing countries’ deficit performances.

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