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Economics Flash - Italy’s Stability Program: Government places emphasis on strengthening growth

  • The Italian government updated its macroeconomic and fiscal forecast, which reflects its decision to increase the budget deficit by EUR 40bn this year, mainly to sustain firms and prevent permanent losses of activity, and by EUR 6bn, on average, per year in the period 2022-33 to further strengthen the Next Generation EU program to boost public investment.
  • The budget deficit for 2021 has been set at 11.8% of GDP amid lower growth than previously anticipated due to restrictions to counter the COVID-19 pandemic, and the additional spending agreed since January 2021 (about 4% of GDP in total). The bulk of measures approved this year are temporary in nature and therefore the government sees the budget deficit declining to 5.9% of GDP in 2022.
  • Consequently, the public debt/GDP ratio will increase to slightly below 160% of GDP in 2021 and is expected to decline to 156.3% in 2022, remaining above the 2020 level. However, the cost of servicing this higher public debt remains manageable, with the ratio of interest expenditure to total revenue in 2021 being lower than it was before the pandemic.
  • Lastly, the government’s budget-deficit path has been set consistent with the use of EU resources, which will be formalized in Italy’s Recovery and Resilience Plan once it is approved. The initial framework was broadly confirmed, with the bulk of grants in 2021-23 used to finance new investment, while EU loans will be activated in this period mainly to finance existing projects.

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