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Italian prime minister Giorgia Meloni plans to spend €24bn on tax cuts and public sector pay rises next year to spur consumption and support faltering growth, despite investors’ concerns about the country’s finances.
After her Cabinet approved next year’s budget on Monday, Meloni said her three-party, rightwing coalition was working to fulfil the promises made during last year’s election, despite pressure on the public finances.
“It is a budget that I consider very serious, very realistic, a budget that . . . concentrates resources on some big priorities,” Meloni said. “Our first priority is to defend the purchasing power of families.”
Giancarlo Giorgetti, finance minister, called the budget “solid”, adding he was confident “that once the details . . . are read, it will have positive approval in Europe and by the markets”.
Italy announced last month that it was raising its fiscal deficit target for next year to 4.3 per cent of gross domestic product, up from 3.7 per cent set in April, and that it would not reach the EU-mandated fiscal deficit limit of below 3 per cent of GDP until 2026.
That announcement, which Fitch Ratings called a “significant loosening of fiscal policy”, sent Italy’s benchmark 10-year bond yield soaring above 5 per cent for the first time since Europe’s sovereign debt crisis 11 years ago, though it has since fallen back.
Italian 10-year-bonds are now trading at 4.8 per cent, around 200 basis points over the German equivalent and up from around 171bp a month ago, a gauge of investors’ increased concerns. Yields on Italian bonds increased slightly after the budget announcement on Monday, rising 5.3bp, while Germany’s increased 4.6bp.
Both Meloni and Giorgetti said Rome’s room for manoeuvre was constrained by the European Central Bank’s recent interest rate rises, which will cost Italy an additional €13bn in annual interest payments.
Despite the constraints, Italy will spend €10bn extending last year’s cut in workers’ mandatory social payments such as pension contributions, keeping an extra €100 per month in the hands of around 14mn workers.
Italy will also spend €4.3bn to cut income taxes for low and middle-income workers, with the first €28,000 of earnings to be taxed at a single rate of 23 per cent. Rome also earmarked €7bn for public sector salary increases, of which €2.5bn is for health sector workers. Increased funding for police and other security service salaries was the next top priority.
Meloni’s coalition will spend €1bn on new initiatives to encourage Italian women to have more babies, as it seeks to reverse a demographic trend that saw last year’s birth rate hit its lowest level since unification in 1861. Besides an additional month of paid parental leave and free nursery care for a second child, Rome will start making pension contributions on behalf of working women that have two young children or more.
“A woman that gives birth to at least two children . . . has already made an important social contribution,” Meloni said. “This measure helps counter the narrative that favouring childbirth discourages women from working. The two things can go together.”
To help finance these new measures, Giorgetti said the government would cut around €5.5bn in spending from various government ministries and local administrations.
The draft budget, which has yet to be approved by parliament, also aims to raise target revenues through the partial sale of state assets such as the country’s oldest bank Monte dei Paschi and state airways ITA.
Meloni’s government forecast that Italian GDP growth would be 1.2 per cent next year. That compares with an IMF estimate last week of 0.7 per cent. The Bank of Italy has forecast an expansion of 0.8 per cent for 2024.
However, analysts see risks, especially if the conflict between Israel and Hamas spirals into a larger Middle East war.
Rome’s decision to slow its pace of fiscal consolidation could also put it on a collision course with Brussels, analysts warn.
Additional reporting by Giuliana Ricozzi in Rome and Martin Arnold in Frankfurt
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