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Italy Economic Activity December 2022

Italy: Government approves 2023 budget with smaller fiscal deficit

The 2023 budget will lower the tax burden on labor, small businesses and the self-employed while narrowing the budget deficit.

The budget marks a continuation of the previous government’s prudent fiscal stance.

However, if the energy crisis lasts for longer than expected, additional fiscal resources will have to be found, which would cause the government to miss its deficit target.

The main takeaways: The government presented the 2023 budget on 21 November, which the European Commission subsequently greenlighted on 14 December. The budget contains a net fiscal stimulus of around EUR 20 billion in 2023 to shield households and businesses from the impacts of the cost-of-living and energy crises. It includes a EUR 4.2 billion tax cut on labor for low-income workers and an extension of the optional flat tax rate on incomes of up to EUR 85,000 for small businesses and the self-employed. On top of this, the tax rate on productivity bonuses is reduced. To recoup revenue, the budget increases the tax rate on energy companies’ extra profits to 50% from the current 25%. The upshot of the various budget measures is that the fiscal deficit is seen narrowing from an expected 5.6% in 2022 to 4.5% next year.

Key budget assumptions: The government projects 0.6% GDP growth in 2023, above the 0.0% Consensus of FocusEconomics’ analysts. This slightly optimistic growth assumption, elevated social spending pressures due to high inflation, and a potential tax shortfall if cash payments increase could all threaten the government’s deficit target. Moreover, rising interest rates and energy prices, as well as a sharper-than-expected cooling in the EU economy, pose further risks to the sustainability of public finances.

On the budget, analysts at the EIU commented:

“The government’s fiscal projections should be viewed with a degree of caution. The economic outlook is highly uncertain, and government borrowing costs have risen sharply and could rise further.”

Regarding measures to shield against the cost-of-living and energy crises, they added:

“The funds earmarked in the 2023 budget will cover the cost of the ‘temporary’ support measures for only three to four months. If the energy crisis is more protracted, the government would be faced with difficult choices: to let the measures expire; to redirect funds from other areas of the budget intended for other election promises; to seek a further relaxation of its fiscal targets, potentially risking a negative reaction from the financial markets or Italy’s EU partners; or to further increase the tax on the additional profits of energy companies.”

FocusEconomics panelists expect the fiscal deficit to be 4.7% in 2023 and 4.1% in 2024.

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