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EU lowers Italy's growth forecast amid clash over 2019 budget

EU lowers Italy's growth forecast amid clash over 2019 budget
(Image Credit: Pexels)

The European Commission forecast on Thursday the Italian economy would grow more slowly in the next two years than Rome thinks, making government budget deficits much higher than assumed by Italy while public debt would be stable rather than decline.

The forecasts underline the Commission's view, backed last Monday by all euro zone finance ministers, that Italy's 2019 draft budget blatantly breaks European Union fiscal rules, which call for annual reductions in deficit and debt.

The Commission's projections are likely to provide arguments for the EU executive arm to start disciplinary steps against Rome later this month, unless Italy sends in a revised budget draft that is in line with EU rules by Nov. 13.

Itay has repeatedly said it would not change the draft budget's targets, triggering an unprecedented clash with the rest of the euro zone by the populist government in Rome that won elections on promises of higher spending and tax cuts.

In a regular economic forecast for the 28 countries that make up the European Union, the Commission said Italian gross domestic product would grow 1.1 per cent this year, below Rome's projection of 1.2 per cent in its draft budget.

In 2019, Italian GDP would rise 1.2 per cent, the Commission said, instead of the 1.5 per cent seen by Italy and in 2020 it would rise 1.3 per cent, rather than the 1.6 seen by Rome.

Lower growth means that Italy's headline budget deficit would be at 1.9 per cent of GDP this year, above Italy's own forecast of 1.8 per cent.

Next year, the budget gap, boosted by plans of higher spending and tax cuts to deliver on election promises, would surge to 2.9 percent, rather than 2.4 percent seen by Italy and to 3.1 percent in 2020, rather than fall to 2.1 as Rome assumes. EU rules foresee headline deficits should stay below 3 percent.

Italy's structural deficit, which excludes one-offs and business cycle swings, would widen even more dramatically from 1.8 per cent of GDP seen this year to 3.0 per cent in 2019 and to 3.5 per cent in 2020.

Under EU rules, of which the Commission is the enforcer, Italy should cut its structural deficit next year to 1.2 per cent of GDP rather than allow it to rise and continue cutting it every year until it reaches a surplus.

Deficit-cutting policies would help Italy, the euro zone's third biggest economy, to reduce its public debt, the second highest in Europe after Greece. The Commission forecast Italy's' debt at 131.1 percent of GDP this year against 131.2 last year.

Italian Economy Minister Giovanni Tria has been arguing that the additional stimulus to the economy from the higher budget deficit would accelerate economic growth and that debt would fall as a result.

But the Commission's forecasts showed the effect next year would be minuscule as the ratio would edge lower to only 131.0 per cent and it would reverse in 2020 to 131.1 per cent.

Financial markets have reacted to the 2019 draft budget with a sharp rise in Italian borrowing costs and euro zone officials are concerned that at some point investors might lose confidence in Italy's ability to repay its debts, triggering another sovereign debt crisis like the one set off by Greece in 2010.

The Commission's forecasts showed that unless Italy's policies change, its primary surplus -- the budget balance before debt servicing costs -- would fall to 1.0 per cent of GDP next year from 1.7 per cent in 2018.

It would decline further to 0.8 per cent of GDP in 2020 showing diminishing debt servicing strength.

(With inputs from agencies.)

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