Italy’s budget: How far will the government test the markets/EU? – Nomura

The budget bill that Italy must submit to its parliament by 27 September – and to the European Commission by 15 October – has been a cause of much concern in the financial markets over the last few weeks, according to analysts at Nomura.

Key Quotes

“A loose fiscal policy is currently being discussed in the corridors of government and may further increase Italian debt and boost the country’s fiscal deficit substantially. This ultimately may cause friction between Italy’s 5SM/League government and the European Union which is what seems to be worrying markets the most.”

“Despite the government being vague thus far on the details of September’s budget bill, recent statements from Finance Minister Giovanni Tria and the two party leaders Luigi di Maio (5SM) and Matteo Salvini (League) suggest the government will press ahead with a number of high-cost fiscal measures in 2019.”

“It is difficult to estimate the actual cost of these fiscal measures. The range of economist estimates has been large, perhaps unsurprisingly because the government has provided few indications about the cost and structure of three of its key proposals for: a) a flat tax, b) citizens’ income and c) pension reform.”

“Moreover, on top of these expensive planned fiscal measures there are a number of other unavoidable costs that the government must face in its 2019 budget. These include mandatory financial expenditure, increased interest costs and a reversal of plans to privatise some state-owned companies.”

“In what follows we stress the headline and structural fiscal deficits relative to April’s Document of Economy and Finance (DeF) to examine how significant the effect will be on the nation’s finances.”

“We conclude that the 2019 deficit may rise from an initially estimated 0.8% earlier this year to around 2.5% in next month’s budget update. Further increases are likely in subsequent years as the government’s fiscal plan continues to be rolled out.”