How will Italy's budget plan impact its public debt levels

Introduction

Italy’s budget plan is expected to have a complex impact on its public debt levels, with initial improvements followed by a projected increase in the debt-to-GDP ratio:

Short-term Improvement

Italy’s gross general government debt declined substantially to 133% of GDP in 2023 from 152% in 2020, despite high budget deficits.

This reduction was largely due to the accounting treatment of the Superbonus tax incentive program.

Medium-term Projection

Despite efforts to reduce the budget deficit, Italy’s debt-to-GDP ratio is projected to rise over the coming years:

Expected to increase from 134.8% in 2023 to 137.5% by 2027.

Some projections suggest it could reach 138% of GDP by 2027.

The European Commission forecasts a rise to 139.3% by 2026.

Factors Influencing Debt Levels

Budget Deficit Reduction

The general government deficit is forecast to drop from 7.2% in 2023 to 3.8% of GDP in 2024.

Further reduction to 2.9% of GDP is expected by 2026.

Primary Balance

Italy aims to achieve a small primary surplus of 0.1% of GDP in 2024.

The primary balance is projected to improve, reaching 1.1% of GDP by 2026.

Interest Expenditure

Interest payments are expected to increase:

Forecast to reach 3.9% of GDP in 2024.

Projected to rise to 4% of GDP by 2026.

Superbonus Impact

The Superbonus tax incentive program is creating a discrepancy between accrual and cash budget balances.

It will add almost 2% of GDP per year to debt levels from 2024 to 2027.

Long-term Outlook

Beyond 2027, the impact of the Superbonus is expected to diminish as the government has reduced its attractiveness.

The success of the debt reduction plan will depend on continued economic growth and labor market resilience.

Conclusion

Italy’s budget plan aims to improve fiscal stability, the country’s high debt levels remain a significant challenge. The projected increase in the debt-to-GDP ratio over the medium term underscores the ongoing struggle to balance fiscal consolidation with economic growth and social welfare commitments.