Italy announces €24bn of tax cuts and wage increases to boost the faltering economy

Giorgia Mello, the Italian Prime Minister, plans to spend €24bn next year on tax cuts and pay increases for public sector workers to boost consumption and revive a stagnant economy. This is despite investor concerns over Italy’s finances.

Meloni, after her cabinet approved the budget for next year on Monday, said that her right-wing, three-party coalition is working to fulfill the promises made at the last election, despite the pressures on public finances.

“It’s a budget I think is very serious and realistic. It’s a budget. . . Meloni stated that the resources are concentrated on a few major priorities. Meloni said, “Our top priority is to protect the purchasing power for families.”

Giancarlo Giorgetti called the budget “solid” and said he was confident that “once the details are worked out, the budget will be solid”. . . “If the book is read in Europe, and by the markets”, it will be a positive success.

It was announced by Italy last month that its Fiscal Deficit Target would be raised to 4.3 percent of Gross Domestic Product for the next year, from 3.7 percent set in April. The country also stated that it wouldn’t reach the EU mandated fiscal deficit limit below 3 percent of GDP until 2026.

This announcement, which Fitch Ratings described as a “significant easing of fiscal policy”, sent Italy’s benchmark 10-year bonds yield surging over 5 per cent for the first since Europe’s sovereign-debt crisis 11 years ago. However, it has since dropped back.

Investors were unmoved, as Italy’s 10-year yield rose just 0.7 basis point to 4.77 percent. The markets have become more concerned about Rome’s finances in recent weeks. The gap between Italy and Germany’s borrowing rates has increased from 171bp to almost 200bp.

Meloni, Giorgetti and others said that Rome’s flexibility was limited due to recent increases in interest rates of the European Central Bank. This will result in an additional €13bn annual interest payment for Italy.

Italy, despite the financial constraints, will spend €10bn to extend the cut made last year in mandatory social payments for workers, such as pension contributions. This will allow around 14mn employees to keep an additional €100 per monthly.

It will also spend €4.3bn on reducing income taxes for workers with low and medium-incomes. The first €28,001 of earnings will be taxed only at a rate of 23%. Rome has also allocated €7bn to increase salaries in the public sector, with €2.5bn going towards health workers. The next priority was to increase funding for salaries in the police and security services.

Meloni’s coalition will invest €1bn in new initiatives that encourage Italian women to have a greater number of babies. It is attempting to reverse the demographic trend, which saw last year’s birth rate reach its lowest point since 1861. Rome will begin making pension contributions for working women who have at least two children.

“A woman who has at least two children.” . . Meloni stated that Meloni has made a significant social contribution. This measure counters the myth that women are discouraged from working because of childbirth. Both can be done together.

Giorgetti announced that the government will cut spending by around €5.5bn from different government ministries and local authorities to help finance these measures.

The draft budget that has not yet been approved by the parliament aims at raising target revenues via the partial sale state assets, such as the oldest bank in the country Monte dei Paschi, and the state airline ITA.

Meloni’s Government forecasts that Italian GDP will grow by 1.2 percent next year. This compares to an IMF estimate of 0.7 percent last week. The Bank of Italy forecasts an increase of 0.8% for 2024.

Analysts do see some risks, particularly if the conflict between Israel & Hamas escalates into a wider Middle East war.

Analysts warn that Rome’s decision slowing its fiscal consolidation pace could put it in a collision with Brussels.