Italy presents 2017 budget, seeks compromise with Brussels

Italy's Economic Minister Pier Carlo Padoan on 10 October 2016. [Council]

Italian Prime Minister Matteo Renzi announced his 2017 budget plan on Saturday (15 October), hoping to persuade the European Commission to approve its minimal reduction in the budget deficit next year while avoiding unpopular belt-tightening.

Renzi faces a referendum in December on constitutional reform which looks set to decide his political future, raising concerns further afield about stability in the eurozone’s third-largest economy.

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The budget package raises health spending and sets aside €7 billion over three years for measures relating to pensions, Renzi said. His cabinet has also approved a decree to close an unpopular tax enforcement agency.

“The basic design is fewer taxes, more rights,” he told a news conference after a cabinet meeting to approve the measures, which he said included some €2.5 billion in investments.

The budget’s structure had already been set out by Economy Minister Pier Carlo Padoan. But Renzi said extra provisions had been added to deal with the migrant crisis and reconstruction after a devastating earthquake in August.

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Under the budget plan, the 2017 deficit is expected to come to 2.3% of gross domestic product, a notch below the 2.4% goal for this year although larger than the government’s previous projection of 2%.

The public finance targets are based on the assumption that the economy will grow by 1% next year – more than most economists forecast. Last week, the public finance watchdog refused to rubber stamp the government’s forecasts.

The budget contains few of the tax handouts that marked Renzi’s last two budgets, but it avoids a rise in the sales tax that had been pencilled in.

The government plans to make up for some of the €15 billion in increased revenues that would have come from the sales tax hike by curbing tax evasion and cut spending by about €2.5 billion.

The budget will now be sent for scrutiny to Brussels, where officials are pushing for Italy to make progress in fiscal consolidation, and begin moving through parliament.

The Commission says that with economic growth remaining weak, curbing the deficit is the only way to rein in public debt, which has reached a record of 133% of GDP, the highest in the euro zone after Greece’s.

“We always have a productive relationship with the European Commission. If there are any problems we will try to identify them sooner rather than later,” Padoan told the news conference.

Renato Brunetta, parliamentary leader of Forza Italia (Go Italy) slammed the plans. “The so-called prime minister has the nerve to promise people little hand-outs just so he doesn’t lose the referendum. In reality, he is getting the country even further into trouble.”

The package needs to be approved by parliament by the end of the year.

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