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FINANZA - ITALIANI IN EUROPA - DA RIUNIONE EUROGRUPPO STATU QUO DIALOGO ECONOMICO CON ITALIA E DUE IPOTESI POSSIBILI DELLA COMMISSIONE PER ATTUAZIONE ART.126/3 DEL TFEU
(2018-11-19)
Focus on: Italy ’s 2019 DBP
Current Council Recommendation under the preventive arm of the SGP The 2018 fiscal CSR for Italy adopted by the Council in July 2018 is the following: “ensure that the nominal growth rate of net primary government expenditure does not exceed 0.1 % in 2019 , corresponding to an annual structural adjustment of 0.6 % of GDP . Use windfall gains to accelerate the reduction of the general government debt ratio.
Shift taxation away from labour, including by reducing tax expenditure and reforming the outdated cadastral values. Step up efforts to tackle the shadow economy, including by strengthening the compulsory use of e -payments through lower legal thresholds for cash payments. Reduce the share of old-age pensions in public spending to create space for other social spending .”
In accordance with EU economic governance rules (Regulation 473/2013), the Italian Government submitted its 2019 Draft Budgetary Plan to the Commission on 16 October. The plan sets the deficit to 2.4% of GDP in 2019 (with the structural deficit of 0.8%), for which the Government had obtained the Parliamentary approval.
For 2020- 21, the deficit targets are 2.1 percent and 1.8 percent of GDP, respectively, underpinned by a VAT safeguard clause The Government projected real GDP growth to raise from 1.2% in 2018 to 1.5% in 2019 and 1.6% in 2020, before decreasing to 1.4% in 2021, with the debt -to -GDP ratio falling from an estimated 130.9% in 2018 to 126.7% in 2021. The Government emphasised that the projected deficit ratios were well below the 3% limit.
IPOL | Economic Governance Support Unit The 2019 DBP implies a nominal rate of growth of net primary government expenditure of 2.7%, which exceeds the recommended maximum increase of 0.1%. The structural deterioration in 2019 amounts to 0.8% of GDP, which points to a significant deviation from the structural improvement of 0.6% recommended by the Council on 13 July 2018. This means that, in structural terms, the budget plan shows a deviation of around 1.4%.
Exchange of letters On 18 October, the Commission sent a letter to the Italian Government, where it sought clarification on the planned deviation from the recommendations addressed to Italy, which were considered a “source of serious concern to the Commission.” After recalling the targets recommended to Italy, the Commission assessed that the proposed net primary government expenditure nominal rate of growth and the structural deterioration in 2019 point top a “significant deviation” of SGP commitments. The Commission also pointed out that “
Italy's plans would not ensur e compliance with the debt reduction benchmark agreed by all Member States ” and that the “ conclusions of the Article 126(3) [of the TFUE] report may need to be reviewed if such broad compliance can no longer be established in light of the planned significa nt deviation.
”. In May 2018, the Commission had adopted a similar report that, taking into consideration all the relevant factors and the fact that Italy was compliant with the preventive arm of the SGP, concluded that the debt criterion should be considered complied with (even if the debt did not decrease by the amount required in the regulation 1467/1997).
The Commission further noted that the MTO is not planned to be achieved and that the forecasts underpinning the Government plans were neither produced nor endorsed by the Italian Independent Fiscal Institution (PBO). The Commission concluded that “Those three factors would seem to point to a “particularly serious non -compliance with the budgetary policy obligations laid down in the Stability and Growth Pact” as set out in Article 7(2) of Regulation (EU) No. 473/2013.
” The Commission asked Italy’s views by the 22th October.
The Italian authorities reacted on 22 October. While acknowledging that its budget was not in line with Italy ?s current commitments under the SGP, the Government argued that the revised deficit
levels were necessary to restore growth and repositioning citizens’ economic conditions. The
authorities stated that even if the PBO forecasts were not adhered to, the Government had
explained to Parliament the reasons for doing so. The Government also pointed o ut that it remained convinced that the foreseen public and private investment would be implemented, due to proposed simplification and rationalisation measures. It also recognised that the DBP forecasts on interest rates are lower than those recently experienced, but considered them still in line with past average levels, and that they would stabilise once markets become familiar with the budget proposals and the structural reforms therein.
The Government also reaffirmed its intention to strictly adhere to the targets established, intervening if necessary to correct deviations, as well as its commitment to the EU and the euro, arguing that the set targets will not affect financial stability in Italy or elsewhere in the euro area.
On the 23 October the Commission issued its opinion on the Italian BDP, requesting by 13 November a DBP revised in line with the Council recommendations addressed to Italy in July 2 018. The Commission identified in the DBP 2019 a particularly serious non -compliance with Italian commitments under the SGP and European Semester. This assessment is based on (a) impact of the deficit -increasing measures, including on the expenditure side, (b) the fact that Italy does not plan to reach the MTO within the forecast horizon, i.e. by 2021, (c) the projected non- compliance with the debt reduction benchmark in 2018 and 2019, with large downsize risks. The Commissions' opinion also pointed out the fact that the macroeconomic forecasts were not produced or endorsed by PBO and that the proposed measures indicate " a clear risk of backtracking on reforms that Italy had adopted (...) as well as with regard to the structural fiscal aspects of the recomme ndations addressed to Italy by the Council on 13 July 2018."
On 29 October, the Director General of the Commission’s DG ECFIN sent a letter to the Director
General of the Italian Finance Ministry, asking for any “relevant factors” to be taken into account by the Commission, in view of the preparation of a report under Article 126(3) TFEU.
A new report under Art. 126(3) could claim that Italy is no more compliant with the preventive arm of the SGP, and the Commission is initiating the procedure to open an EDP against Italy. The Council should open a formal EDP, with specific targets and deadlines, which Italy should comply with. If it does not, the Council may impose sanctions, ranging from a non -interest -bearing deposit until the deficit has been corrected, or even a fine worth up to 0.5% of GDP. The Council could also decide to suspend part or all of the commitments or payments linked to Europ ean Structural and Investment Funds in Italy (recital 24 of Regulation 1303/2013 ).
At its meeting of 5 November, the Eurogroup discussed the Commission opinion on Italy’s DBP for 2019 and agreed with and agreed with the Commission assessment. The Eurogroup recalled "the importance of sound public finances and their coordination within the framework of the SGP as a
prerequisite for durable and sustainable economic growth and a smooth functioning of EMU. The focus on sufficient debt reduction and the path to the Medium -Term Budgetary Objective (MTO) are an integral part of the SGP."
The Eurogroup "looks forward for Italy and the Commission to engage in an open and constructive dialogue and for Italy to cooperate closely with the Commission in the preparation of a revised
budgetary plan which is in line with the SGP."
Meanwhile, on 8 November, the Commission published its Autumn 2018 Forecast , where it sets the estimates for Italian GDP growth at 1.2% in 2019 and 1.3% in 2020. The government deficit is
expected to be 2.9% of GD P in 2019 and 3.1% of GDP in 2020.
On 8 November, the Finance Minister stated that “the Commission’s forecasts are very different from
those of the Italian Government, and are the outcome of a partial and superficial analysis of the DBP, of the budget law and of the public finances, notwithstanding clarifications and informat ion provided by
Italy... Nevertheless, this technical misstep will not affect the constructive dialogue between the Government and the Commission.”.
On 13 November, the IMF published the staff’s conclusion s on its annual Article IV visit to Italy: it projects annual economic growth of around 1% in 2018-20, declining thereafter. The overall deficit for 2019 is projected at about 2, 7% of GDP. For 2020 -21, deficits are projected at about 2.8% -2.9%.
The IMF also points that “Elevated yields affect the cost and availability of banks’ funding a nd weaken
their balance sheets. We project public debt to remain at around 130 percent of GDP over the next years .”
On 13 November, the Italian Minister of Finance sent a revised DBP and an accompanying letter to the Commission. The Minister confirmed the fiscal objectives of the Government, in view of contrasting the slowdown of the economic cycle, while facing poverty and social distress, as well
some “distortion” introduced with recent pension reforms. He confirmed that the 2.4% deficit for
2019 is calculated on the “trend GDP” (without the new expansionary measures) and that therefore such target is very prudent. The new DBP sets privatisations a t 1% of GDP in 2019 with the aim to have a dampening effect on the debt ratio. Recent natural events call for urgent public works, which should be considered as exceptional and would allow for the application of flexibility clauses. Last ly, the Minister notes that the Government must inform timely the Parliament of possible deviations from the set objectives, and that in such a case the Minister must take timely and appropriate measures, while respecting the Constitution.
On the same day, the Ministry als o stated that the Treasury Administration sent a report to the
Commission, presenting the “relevant factors affecting the debt trajectory”, as requested by the
Commission services in October.
What next?
The Commission may trigger at any time an assessment of compliance with the SGP based either on the nominal target, the structural target, on the debt level, or a combination of these. In the case of a prima facie observed non-compliance with the provisions of the SGP, the Commission has two main options :
• Either make a report to assess whether an Excessive Deficit Procedure could be open based on the debt criterion of the SGP, taking into account all relevant factors (including the respect the required structural adjustment), or
•Open a Significant Deviation Procedure under the preventive arm of the SGP.
In previous years (the latest in May 2018, as stated above) the Commission made a report under Article 126/3 of the TFEU. (Versioni consolidate del trattato sull'Unione europea e del trattato sul funzionamento dell'Unione europea).
The reports conclud ed that Italy was still compliant with the debt criteria based on an overall assessment , including the broad respect of the structural adjustment path.
However, since the Italian 2019 DBP deviates significantly from the structural adjustment required by the Council in July 2018, the main argument used earlier to consider Italy compliant with the debt rule seem
s not to be longer valid. Therefore, it is most likely that the Commission will prepare a report under Art. 126(3) of the TFEU assessing compliance with the debt criterion. In this case, this would be the first time the debt criteria would be used to open an EDP. (19/11/2018-ITL/ITNET)
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