Italy Aims to Cut Deficit Below EU Threshold by 2026 Amid Fiscal Challenges

Italy, a founding member of the European Union, is set to reaffirm its commitment to fiscal responsibility by pledging to reduce its deficit-to-GDP ratio below the EU's 3% ceiling by 2026. This plan is expected to be outlined in the Treasury's medium-term structural budget framework, due for submission to EU authorities by September 20, 2024.

The Italian government, led by Prime Minister Giorgia Meloni, faces a complex economic landscape. As the third-largest economy in the Eurozone, Italy grapples with high public debt, slow growth, and significant regional economic disparities. The country's deficit reached 7.4% of GDP in 2023, the highest in the euro zone, partly due to generous incentives for energy-saving home improvements.

To address these fiscal challenges, Italy must adhere to the EU's Excessive Deficit Procedure and comply with recently reformed fiscal rules. These regulations mandate a gradual but consistent reduction in deficit and debt from 2025 onwards, spanning a four to seven-year period. Specifically, Italy is required to decrease its structural budget deficit by 0.5% to 0.6% of GDP annually.

According to sources familiar with the matter, the Treasury anticipates Italy's deficit to align closely with budget estimates outlined earlier this year. The government aims to reduce the fiscal gap to 3.6% of GDP in 2025 and further to 2.9% in 2026, despite slightly higher projections under current trends.

"We are committed to fiscal responsibility while also supporting our citizens through targeted economic measures."

However, the Meloni administration faces a significant challenge in balancing deficit reduction with its pledge to extend temporary tax cuts and social contribution reductions. These measures, currently set to expire in December 2024, benefit individuals earning up to €28,000 annually. Extending these policies through 2025 would cost the state approximately €15 billion.

Furthermore, the government is reportedly considering additional tax cuts for those earning up to €60,000 per year. This proposal, combined with the existing measures, raises questions about how Italy plans to finance these initiatives while simultaneously reducing its deficit.

Italy's economic situation is further complicated by several long-standing issues. The country has one of the highest tax evasion rates in Europe, estimated at around 30% of tax revenue. Additionally, Italy faces challenges related to an aging population, low productivity growth, and a significant informal economy.

As the deadline for submitting the structural budget plan approaches, Prime Minister Meloni is scheduled to meet with key coalition members on August 30, 2024, to discuss Rome's budget plans. The outcome of these discussions will be crucial in determining Italy's path towards fiscal stability and economic growth.

In conclusion, Italy's commitment to reducing its deficit-to-GDP ratio below the EU threshold by 2026 represents a significant challenge. The government must navigate complex economic realities, balancing fiscal responsibility with social welfare measures, all while addressing long-standing structural issues in the Italian economy.