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Italy Fiscal October 2020

Italy: Government approves stimulatory budget to sustain recovery following coronavirus blow

On 19 October, the government approved the 2021 draft budget, which includes a stimulus package of tax cuts, the extension of furlough schemes and additional spending to help the economy cope with the impact of the coronavirus outbreak. The plan, which should be partly funded by EU recovery fund grants and loans, comes at a time when the country is experiencing a resurgence in new Covid-19 cases, which has prompted the government to tighten containment measures. The draft must now be reviewed by the European Commission and approved by the national parliament by 31 December.

The EUR 40 billion stimulus package contained within the budget sets aside EUR 5 billion to extend temporary lay-off schemes for 18 weeks from 1 January 2021, in order to sustain household spending and prevent job losses. It also provides EUR 4 billion to support the sectors hit hardest by the pandemic, and allocates EUR 4 billion to the health system. Moreover, in an effort to boost job creation, the package assigns EUR 13 billion for tax breaks to stimulate hiring, especially of younger people in Italy’s less-developed southern regions. This includes EUR 7 billion to make income tax wedge cuts permanent, thus making hiring cheaper and sustaining disposable income. The expansionary plan is forecast to yield a fiscal deficit of 7.0% of GDP next year, which is a more pessimistic forecast than our Consensus’ 6.2% deficit projection, although still an improvement from this year’s expected 11.1% shortfall.

Looking ahead, the mix between extra spending and lower taxes should mitigate the most harmful effects of the pandemic on the labor market and on firms’ liquidity. Italy is set to receive EUR 209 billion of the EU recovery fund over the 2021–2027 period, which should help to sustain public finances and prevent market turbulence, although the country’s massive stock of public debt weighs on the medium- to long-term economic outlook.

Commenting on the likely effects of the budget on the country’s economic growth prospects, economists at Goldman Sachs stated:

“The budget should support growth in 2021, as fiscal multipliers are likely to be sizeable given ample spare capacity. Nonetheless, both the composition of the budget and its implementation warrant close attention. The proposed policy mix builds on income support and transfers rather than the investment needed to support growth on a sustainable basis. Moreover, the implementation of projects funded by European programmes is likely to be slow, probably shifting some of the planned expansion into 2022.”

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