EU warns Italy on deficit threshold
Updated economic blueprint expected to include revised forecast19 September, 17:27
"If it's 3.1% measures will be needed to bring it down to 3%".
On Wednesday Italian government sources said the executive has revised its deficit-to-GDP ratio forecast to 3%-3.1% in its updated economic blueprint, the DEF, which will be presented at a cabinet meeting Friday.
But they stressed it should be possible to stay within the 3% threshold without an additional budget package, even though the economy is still not out of its longest recession in over two decades. Earlier this year, the EC closed an excessive-deficit procedure it had opened against Italy in 2009 after the deficit was 3% last year and forecast to be 2.9% for 2013 in the previous version of the DEF.
The Italian government had already revised its deficit forecast up to 3% from 2.9% earlier this month following the decision to roll back the IMU property tax to meet demands from Berlusconi's People of Freedom (PdL) party.
Soon after that, the European Central Bank warned Italy risked missing its deficit target and mentioned scrapping IMU and moves to pay public-sector debts to private companies as factors.
The price of not meeting the 3% requirement is stiff - states that are under an excessive deficit procedure and have a debt-GDP ratio of over 60% are obliged to divert public money into trying to reduce that ratio. In Italy's case, escaping the procedure has meant about eight billion euros freed up for public spending. The situation is complex, given the danger of Premier Enrico Letta's grand-coalition government collapsing in the fallout of last month's decision by the supreme court to uphold a tax-fraud conviction against centre-right leader Silvio Berlusconi.
The turbulence is set to make negotiations tough for the 2014 budget law, but the strain of having to pass additional budget measures to avoid a deficit this year could be too much for the executive to bear. The government is also trying to find the money to avoid a 1% rise in the top band of value added tax scheduled to come into force next month. On Tuesday European Monetary and Economic Affairs Commissioner Olli Rehn warned that the Commission would not hesitate to open a new procedure if Italy's deficit went back above 3%. "Italy's excessive-deficit procedure is closed, but Italy will have to honour its commitments," Rehn told the Senate budget committee.
"(If the threshold is broken) the excessive-deficit procedure will have to be reopened. "Italy is fully aware of that".