Italian Budget and EU Rules

Italian’s budget calls for a deficit equal to 2.4 percent of GDP, compared with a 0.8 percent shortfall planned by the government that was swept out of power in March.

It proposes accepting a wider deficit as the cost of delivering on election promises that include a “citizen’s income” for the poor, tax cuts and a lower retirement age. Under Italy’s plan, the so-called structural deficit — a key measure for the commission, since it strips out effects of the economic cycle and one-off spending items — is projected to deteriorate by 0.8 percent, far from the 0.6 percent improvement Brussels wants.

EU countries have to follow a set of fiscal rules spelled out in what’s called the Stability and Growth Pact. Focusing on deficit and debt, the rules are designed to force members to maintain sound public finances and coordinate their spending policies.

No country should have a budget deficit larger than 3 percent of gross domestic product or debt above 60 percent of output, and governments must set annual targets to show they’re moving in the right direction.

The EU made the rules for euro-area countries stricter in 2013 following the sovereign debt crisis, which brought some member states including Greece, Portugal and Ireland to the brink of collapse and needing bailouts. The updated rules require euro-zone nations to pursue a balanced budget by law, a step aimed at keeping mounting public debt in check.

If Italy’s explanation is deemed insufficient, the commission could take the unprecedented step of essentially rejecting the budget plans and asking for revised ones.

If the commission finds a country persistently breaks deficit rules, it could eventually open a so-called excessive deficit procedure — a process where the country has to reduce its deficit by a set deadline or risk sanctions of up to 0.2 percent of output.

However, the EU’s enforcement credibility has come into question, such as when it opted not to penalize repeat offenders Spain and Portugal in 2016. France, too, has received leniency over the years and Germany, Europe’s biggest economy, went unpunished when it broke the rules.

Reference

Bloomberg, Viktoria Dendrinou, 2018-10-19, “What the EU Looks for in the Budgets of Italy and Others”