Exclusive-Italy expects 2021 deficit to be below 10% of national output -source By Reuters

By Giuseppe Fonte

ROME (Reuters) – Italy’s Treasury sees the 2021 budget deficit coming in at under 10% of national output, well below the 11.8% target set in April, as the economy recovers more quickly than expected from the pandemic, a source close to the matter told Reuters.

In its latest forecasts issued in April, the Treasury estimated gross domestic product would grow by 4.5% following the record contraction of 8.9% in 2020, when protracted COVID-19 lockdowns hammered the economy.

However, recent data has been stronger than expected and Economy Minister Daniele Franco said on Sunday that growth of more than 5.8% now looked possible, with a positive impact on public finances.

Growth of close to 6% would improve the deficit-to-GDP ratio by almost one percentage point through increased tax revenues, the source told Reuters, adding that the firm recovery was not the only factor helping to reduce the fiscal gap.

Stimulus measures approved earlier this year have proved less costly than anticipated due to a lower-than expected take-up by families and firms, the source said.

The lower deficit will in turn drive Italy’s debt-to-GDP ratio below the 159.8% targeted in April.

However, a political source cautioned that some ruling parties could put pressure on Prime Minister Mario Draghi’s government to use the fiscal leeway to fund additional stimulus measures by the end of this year. This could result in Draghi setting a deficit target somewhat higher than 10%.

Italy reported a 9.5% deficit-to-GDP ratio in 2020, which was the highest since the early 1990s.

The Treasury will officially update growth forecasts and public finance targets by Sept. 27 in its Economic and Financial Document (DEF). This will form the preliminary framework for the 2022 budget.

Franco said on Sunday the government planned to maintain expansionary policies to recoup the growth lost due to COVID-19 as quickly as possible. He promised the debt-to-GDP ratio would come down from 2022.

To turn the post-pandemic rebound into higher structural growth, the government wants to cut taxes for individuals and companies in a fiscal reform which could win cabinet approval this month.