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Italy Must Find EUR25bn

by Ulrika Lomas,, Brussels

11 May 2010

Out of the Italian Treasury’s latest economic and budgetary report for this year, it appears that the maintenance of Italy’s promise to the European Union to reduce its fiscal deficit in the period to 2012 will require the government to find additional funds of almost EUR25bn (USD31.8bn).

The government has always confirmed that it will adhere to a 0.5% reduction to its budgetary deficit in 2010, from the shortfall of about 5.5% of gross domestic product (GDP) seen in 2009. The Italian government then intends to reduce the deficit further to 3.9% of GDP in 2011 and 2.7% in 2012.

However, an increase in the deficit to 2012 is now being forecast, due principally to a shortfall in tax receipts, which is itself the result of a reduction in Italy’s expected future economic growth rates. For example, the forecasted rise in GDP is now seen at 1% in 2010 (as against 1.1% previously) and only 1.5% in 2011 (as against 2%). The 2012 growth rate expected in 2012 has been left unchanged.

To reach the targeted deficit levels, it is said that the reduced economic growth would therefore entail a budgetary correction of 1.6% during the period to 2012. With a GDP in Italy of some EUR1.55 trillion in 2010, the fiscal package required works out to be EUR24.8bn. However, additional funds might also be required considering Italy’s commitment to the support being provided to Greece.

According to the Minister of the Economy, Giulio Tremonti, the government’s belief is that, in the current difficult European financial situation, it should keep strictly to its original commitments. While arguing the continued need for fiscal reform, he therefore also confirmed that the public sector deficit would be consolidated, as promised.

With the country’s recovery still fragile, the government is likely to act to reduce its expenditure, rather than increase taxes. The latter would, in any case, be extremely difficult as Italy’s Premier, Silvio Berlusconi, recently stressed that, if a fiscal package was required, the government would not “put its hands in ordinary people’s pockets.”

TAGS: tax | economics | fiscal policy | gross domestic product (GDP) | budget | Italy | revenue statistics

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