The European Commission has identified in the draft budgetary plan submitted by Italy for 2019 a particularly serious non-compliance with the fiscal recommendation addressed to Italy by the Council on 13 July 2018.
In line with the relevant rules, the Commission has adopted an Opinion that requests Italy to submit a revised draft budgetary plan within three weeks.
Having taken all factors into account, and after consulting the Italian authorities, the European Commission considers that Italy’s draft budgetary plan for 2019 presents a particularly serious deviation from the Council’s recommendation of 13 July 2018. The Commission also notes that the plan is not in line with the commitments presented by Italy in its Stability Programme of April 2018. The Commission is therefore requesting Italy to submit a revised draft budgetary plan for 2019. This revised draft budgetary plan should provide for compliance with the recommendation addressed to Italy by the Council, including Italy, on 13 July 2018 and which were also endorsed by the European Council on 28 June. This is the first time that the Commission has requested the presentation of a revised draft budgetary plan.
“The euro area is built on strong bonds of trust, underpinned by rules that are the same for everybody. It is our job and duty to uphold common interest and mutual commitments taken by the member countries. Italy’s debt is among the highest in Europe, and Italian taxpayers spend about the same amount on it as on education. In this spirit, we see no alternative but to request the Italian government to revise its draft budgetary plan for 2019, and we look forward to an open and constructive dialogue in the weeks to come,” said Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union.
“The opinion adopted today by the Commission should come as no surprise to anyone, as the Italian Government’s draft budget represents a clear and intentional deviation from the commitments made by Italy last July. However, our door is not closing: we wish to continue our constructive dialogue with the Italian authorities. I welcome Minister Tria’s commitment to this end and we must move forward in this spirit in the coming weeks,” said Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs.
The Commission’s assessment of the draft budgetary plan points to a planned significant deviation from the fiscal path recommended by the Council. In July 2018, the Council recommended that Italy should make a structural improvement of 0.6% of GDP. The draft budgetary plan presented by Italy instead provides for a structural deterioration amounting to 0.8% of GDP in 2019.
Both the fact that the draft budgetary plan provides for a fiscal expansion of close to 1% of GDP, while the Council had recommended a fiscal adjustment, and the size of the deviation (a gap of around 1.4% of GDP or €25 billion) are unprecedented in the history of the Stability and Growth Pact.
It is important to note that the fiscal requirements for Italy in 2019, as for all Member States, were endorsed unanimously by the European Council of 28 June 2018 and adopted by the Council of the European Union on 13 July 2018, including Italy.
Italy’s public debt-to-GDP ratio, at 131.2% in 2017, is the second largest in the European Union in relative terms and one of the largest in the world. This is the equivalent of an average burden of €37,000 per inhabitant. Debt-servicing costs absorb a considerably larger amount of public resources in Italy than in the rest of the euro area, taking a toll on the country’s productive spending. For instance, Italy’s interest expenditure stood in 2017 at around €65.5 billion or 3.8% of GDP, which was broadly the same amount of public resources devoted to education.
The planned reduction in the debt-to-GDP ratio is subject to large downside risks, given that it relies on optimistic growth assumptions in the draft budgetary plan. This means that Italy’s compliance with the debt reduction benchmark agreed by all Member States, which requires a steady reduction of the debt level towards the 60% threshold referred to in the EU Treaties, is also in question.
It is, of course, the prerogative of each Member State to set priorities and determine the allocation of budget resources. However, commitments that have been made and jointly decided upon in order to pursue a fiscally sustainable path must also be met: this is the logic of the applicable rules.
The relevant legislation provides that the Italian authorities should present the revised draft budgetary plan to the Commission as soon as possible, and in any event, no later than three weeks following the adoption of this Opinion.
In 2015, the Commission presented guidance on how it will apply the existing rules of the Stability and Growth Pact to strengthen the link between structural reforms, investment and fiscal responsibility in support of jobs and growth, which was later translated in to a “Commonly agreed position on Flexibility within the Stability and Growth Pact” and endorsed by the Council in 2016. Italy has been the main beneficiary of this flexibility, benefiting by an amount in the order of €30 billion (or 1.8% of GDP) between 2015 and 2018. This flexibility has supported the implementation of structural reforms and investment, and assisted Italy in responding to exceptional events such as security threats, the refugee crisis and earthquakes.
Italy has benefitted from substantial support through EU-backed financing in recent years. Italy is the second biggest beneficiary under the Juncker Plan. As of October 2018, financing under the European Fund for Strategic Investments is expected to trigger over €50 billion in additional investments. Italy is also the second largest beneficiary of the European Structural and Investment Funds. It has been allocated €44.7 billion between 2014-2020 to support, among others, the competitiveness of small and medium businesses, the creation of quality jobs, the development of necessary skills, better access to the labour market and professional training, research and innovation, environmental protection and the shift towards a low-carbon economy.
In its Stability Programme of April 2018, Italy announced that it would target a deficit of 0.8% of GDP in 2019. The 2019 draft budgetary plan expects the government deficit to markedly increase to 2.4% of GDP in 2019, three times higher than initially planned.
Article 7(2) of Regulation 473/2013 provides that, where, in exceptional cases, after consulting the Member State concerned within one week of submission of the draft budgetary plan, the Commission identifies particularly serious non-compliance with the budgetary policy obligations, the Commission shall adopt an Opinion requesting that a revised draft budgetary plan be submitted as soon as possible and in any event within three weeks of the date of its Opinion.