The government of Prime Minister Giorgia Melons predicted that Italy’s fiscal gap will rise to 5.3% of its gross domestic product in this year. This is higher than the forecasted 5.3%, because of the ballooning costs associated with a controversial tax cut.
The “Superbonus”, which provided Italians with a tax credit of 110 percent for renovations that improved energy efficiency or upgraded building exteriors, sparked a home improvement boom. This helped to accelerate Italy’s economic recovery after the Covid-19 epidemic.
Meloni estimates that the scheme will cost the public about €140bn. She is a fierce critic of Superbonus and has taken steps to limit the scheme since she took office last year.
Meloni said on state television that “the numbers speak for themselves” last week. The money was taken from education, health care and pensions to renovate castles and second homes.
The Italian government’s budget framework, approved on Wednesday by Meloni’s cabinet, increased the fiscal deficit goal for this year to 5.3 percent of GDP.
The government has raised its 2024 target deficit to 4.3 percent of GDP from the previous 3.7 percent.
The government also lowered their economic growth predictions for this year, and next. This is due to the wider problems of other nations in the eurozone and the increased cost of borrowing after the European Central Bank raised interest rates.
The GDP growth in Italy is now estimated to be 0.8% this year, down from 1% previously.
The government reduced its forecast for 2024 GDP growth to 1.2 percent from 1.5 percent earlier.
The government updated its financial framework in April and the revised GDP growth and forecasts will be the basis for the budget next year. Details will be revealed next month.
Meloni’s coalition of right-wing parties faces a difficult balancing act when drafting the budget. They must reassure international markets they are maintaining fiscal discipline, while also fulfilling their electoral promises.
Giancarlo Giorgetti, Italy’s Finance Minister, has complained that recent ECB rate increases will cost Italy – which has a debt-to GDP ratio of over 142 percent – an additional €15bn.
Giorgetti said the Superbonus program, which was started by an earlier coalition led by populist Five Star Movement, is what is complicating the situation for the present government. It leaves it with little financial space to undertake other projects.
The minister said to a business audience in this month, “When I think about the Superbonus I get a stomachache.” It paralyzes the economy and leaves little space for other measures.
Investors are cautious as they watch to see how government will handle the pressures it faces.
The difference in bond yields between Germany and Italy — an important indicator of the market’s sentiment towards Europe’s most indebted economy — has risen above 190 basis point for the first week since May.