Italy – A “two-faced” new long-term fiscal plan: more margins to be used to sustain the cycle, but the target to cut spending in order to avoid tax hikes remains challenging….
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Intesa Sanpaolo – Research Department For professional investors and advisers only
– In its preliminary review1 of the 3y Economic and Financial Document to be approved by April 10th, the Government raised growth forecasts for 2015 (to 0.7% from 0.6% previous) and to a larger extent for the 2016-17 period (to 1.4% from 1% in 2016 and to 1.5% from 1.3% in 2017). The comments below are based on what has already been disclosed and not on the final document, which is yet to be released.
– Courtesy of the improved growth outlook, but above all to savings on interest spending, the no-policy-change scenario on public finance improved strongly since last Autumn: without any intervention, deficit is now expected to decline to -1.4% from -1.8% projected last Autumn in 2016 and to -0.2% from -0.8% in 2017. The balanced budget in structural terms would hence be achieved one year in advance, in 2016 rather than 2017. Yet, the Govt decided to confirm previous targets on deficit (-2.6% in 2015 and -1.8% in 2016) and to use the margins for new measures aimed at strengthening the recovery: the gap between targets and projections at unchanged policies on deficit is worth 0.5% of GDP on average in 2016-18; more limited are margins to be used in 2015 (0.1% ie 1.6Bn).
– The main point is that the Govt explicitly invoked the „reform clause“ to reduce the structural correction to be implemented in 2016 to 0.1% of GDP from the 0.5% that would be required by the SGP rules (even the latest, more flexible ones). In our view, it will be hard for the EU Commission to approve such a “proposal”. A negotiation similar to that on the 2015 correction could start, leading in the best case to a compromise around 0.3% like in the current year.
– In any case, the impact of fiscal measures on 2016-17 will hardly be expansionary, as the Govt has to find resources to cover the two safeguard clauses included in the past two Budgets, in order to avoid an unwelcome increase in indirect taxes and VAT in particular: such clauses are worth 16Bn in 2016, 25Bn in 2017 and 28Bn in 2018. It is likely that the next Budget will detail measures to fully cover the clauses only for 2016 (16Bn ie 1% of GDP, of which 6Bn should come from savings on interest expenditure and 10Bn from „spending review“).
– Once again, the Govt revised downwards targets on asset sales. Revenues from privatizations are now estimated at 0.4% of GDP (from 0.7% previous) in 2015 and a total 1.7-1.8% in 2015-18. Yet, again courtesy of higher growth and lower interest spending, debt should peak this year (to 132.5% of GDP, down from 133.4% projected last Autumn) and then gradually decrease in 2016-18 (to 123.4% at the end of the period).
– In short, it is very welcome that the Govt will try to use margins created by savings on the cost of debt to implement new measures designed at strengthening the (still fragile) economic recovery in the pipeline. Moreover, it was important to confirm the strong commitment to avoid the tax increases implicit in the safeguard clauses. We think new estimates on the public finance path are credible as growth forecasts are not too cautious but projections on interest spending definitely are (based on forward rates curves, there could be savings worth 0.3/0.4% vs Govt estimates in 2016-18).
– Yet, it is not assured, and indeed it is unlikely, that the Govt will be authorized by the EU to use all the new margins for expansionary measures: as for the current year, the structural correction in 2016 could be at the end of the day around 0.3% against the 0.1% proposed by the Govt. Besides, the target to cover the bulk of safeguard clauses with „spending review“ savings remains challenging, and still needs to be detailed. In any case, the stance of fiscal policy starting from 2016 will return moderately tight after two years of easing bias.
1 http://www.governo.it/Governo/ConsiglioMinistri/dettaglio.asp?d=78249
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