By Giuseppe Fonte and Gavin Jones
ROME (Reuters) – Italy on Friday targeted its budget deficit at 10.4% of gross domestic product this year and said the public debt would rise to 155.7% of GDP, the highest level since World War II.
The Economic and Financial Document (DEF) approved by cabinet reflects the huge hit to the euro zone’s third largest economy from the coronavirus epidemic.
Last year’s budget deficit came in at 1.6% of GDP, its lowest level for 12 years, while the debt ratio of 134.8% was already the second highest in the euro zone after Greece.
The last time Rome posted a double-digit deficit was in the early 1990s.
Italy has been one of the countries hardest hit by COVID-19, registering more than 25,000 deaths, the second highest toll in the world after that of the United States.
The DEF forecasts an economic contraction of 8.0% this year under an unchanged policy scenario, the government said, although the final document has not yet been published.
This 8% estimate does not include the impact of a stimulus package due to be approved by the government this month, so the growth contraction may be somewhat smaller.
The package will be worth some 155 billion euros ($167.23 billion), a draft of the DEF obtained by Reuters said.
However, much of this takes the form of loan guarantees and other earmarked funds which may not be used, so only 55 billion is expected to increase the budget deficit.
The new spending plan will boost funds to supplement the income of the self-employed and workers temporarily laid off, government officials have said. A compensation scheme will help small and very small companies whose turnover has been hit by a government-imposed lockdown to contain the virus epidemic.
The package may also set aside up to 50 billion euros to allow Cassa Depositi e Prestiti to fund core companies in difficulty and protect them from possible foreign predators, government sources said.
VACCINE EXPECTED
The draft document seen by Reuters estimates that GDP declined by 5.5% in the first quarter from the previous three months, and that this will be followed by a 10.5% drop in the second quarter. [L5N2CA2XH]
It sees a rebound of 9.6% in the third quarter and growth of 3.8% in the last three months of the year.
Given the high degree of uncertainty, the Treasury also drew up a worst-case scenario involving a slower recovery in the second half of the year, yielding a full-year GDP contraction of 10.6% and 2021 growth of just 2.3%.
Its baseline scenario “assumes that a large-scale vaccine for COVID-19 has been developed by the first quarter of next year which will favour a further recovery of economic activity.”
On public finances, the budget deficit is seen falling to 5.7% of GDP next year, while the debt is targeted to decline to 152.7%, according to the draft.
Italy had pencilled in an automatic increase in sales tax due to begin in 2021 and continue in following years, but the draft spells out that this hike will be scrapped and not be replaced by alternative levies or spending cuts.
Instead, the government will simply forego the revenues from the tax hike, preferring to allow a higher deficit rather than risk hurting an already weakened economy.
This puts an end to the so-called “safeguard clauses” Rome has included in its annual budgeting process in recent years as a guarantee to the European Commission that it would keep a lid on its public finances.
The draft forecasts that growth will partially rebound next year, with GDP rising 4.7% under an unchanged policy scenario.
(Reporting by Giuseppe Fonte and Gavin Jones; editing by Diane Craft)
