Italy sees 2023 deficit below 5% of GDP despite slashing growth outlook, sources say

By Giuseppe Fonte

ROME (Reuters) – Italy sees its 2023 budget deficit below 5% of national output despite a darkening economic outlook triggered by the energy crisis, three sources close to the matter told Reuters.

Mario Draghi’s outgoing government will this week unveil new growth and public finance estimates in its Economic and Financial Document (DEF), which will form the framework for the 2023 budget to be examined by European Union authorities.

The Treasury forecasts gross domestic product (GDP) will grow by 3.3% this year, up from the 3.1% target which was set in April. For 2023, the government sees GDP growth of only around 0.6%, far below the previous target of 2.4%.

Italy plans to confirm its 2022 budget deficit goal at 5.6% of GDP, Economy Minister Daniele Franco said this month, but lower-than-expected growth will push next year’s fiscal gap above the 3.9% previously targeted.

Nevertheless, the Treasury believes it can limit upward pressure and sees the Italian fiscal gap below 5% of GDP, the sources said.

In confirming a slight reduction in the deficit next year, the Treasury is helped by the fact that surging energy bills increase government revenues from excise duties and value added tax, one of the sources said.

The new figures will all be based on an unchanged policy scenario, as Draghi leaves it up to election victor Giorgia Meloni, leader of the far-right Brothers of Italy party, to set more ambitious targets.

Italy should send the draft budget to Brussels by mid-October for approval, but politicians in the rightist bloc said the new government would probably take office only in early November. It is therefore likely that Draghi will sign off on the draft budget.

The first task for Meloni will be finding billions of euros to keep her election pledges to soften energy costs, cut taxes and block a hike in the retirement age due to kick in from January.

With inflation approaching double figures, the European Central Bank (ECB) delivered two oversized rate hikes in July and September and promised even more action, complicating Italy’s efforts to head off the threat of recession and reduce public debt.

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