FITCH RATINGS * «THE REVISED PROJECTIONS IN ITALY’S (BBB/STABLE) RECENT ‘NADEF’ PLAN REPRESENT A SIGNIFICANT LOOSENING OF FISCAL POLICY RELATIVE TO PREVIOUS TARGETS «

Fitch Ratings-London/Frankfurt-11 October 2023: The revised projections in Italy’s (BBB/Stable) recent ‘NADEF’ plan represent a significant loosening of fiscal policy relative to previous targets, Fitch Ratings says. Our updated general government deficit forecasts of 5.2% of GDP in 2023 and 4.2% in 2024 are now close to the government’s new targets after our upward revisions of 0.8pp and 0.7pp since our sovereign rating review in May. Fitch projects a smaller fall in public debt/GDP than at the review, albeit the debt ratio is lower due to statistical revisions that boosted GDP in 2021-2022.

The government’s wider 2023 deficit target of 5.3% of GDP (from 4.5% in April’s Stability Programme) is driven by the cost of “Superbonus” tax breaks on residential investment exceeding expectations by 1.1% of GDP (taking the overall cost of the scheme since 2020 above 6% of GDP).

The wider 2024 NADEF target of 4.3% of GDP incorporates a net 0.7pp fiscal package, which is expected to include around 0.6pp from tax cuts, mainly on labour. Consolidation measures are fairly small; those outlined on a tax amnesty, spending cuts and a windfall bank tax are estimated to amount to just 0.3% of GDP in 2024. Deficit targets beyond next year have also been loosened, in 2026 by 0.4pp to 2.9% of GDP. Additional detail underpinning the forecasts in the NADEF – the Italian government’s update of its economic and fiscal plans – will become available during Italy’s budgetary process over the coming weeks.

The 2024-2026 deficit path is flattered by the accounting reclassification in March that records the costs of Superbonus tax credits in 2020-2022 in the year in which they are granted rather than used, and the recent decision to treat 2023 the same way. On a cash basis, costs in 2024-2026 will therefore be higher than implied by fiscal deficits, which explains Fitch’s incorporation of overall debt-increasing stock flow adjustments averaging 1.1% of GDP a year over this period. The NADEF projection of a gradual debt/GDP decline to 139.6% in 2026 also incorporates privatisation receipts totalling 1% of GDP, which we view as ambitious.

Fitch now forecasts general government debt/GDP to fall 1.3pp to 140.3% this year, less than the 2.2pp at our May review, reflecting the deficit revision. We then project debt stabilising to

end-2025 at 140% of GDP, as the return to a primary surplus is offset by the stock-flow adjustments and increasing debt servicing costs. However, ISTAT’s large GDP revisions for 2021-2022 in September lowered the end-2022 debt ratio by almost 3pp. As a result, our end-2025 debt/GDP forecast is still 1.6pp lower than we projected in May. The growth-interest differential turns negative in 2026, requiring greater fiscal adjustment to then maintain stable debt/GDP.

Public support for the Meloni government has held up and its parliamentary majority is more stable than many previous administrations. But it faces sizeable political pressure to deliver more of its electoral pledges, which weighs on prospects for greater consolidation and reform to reduce fiscal risks. The potential for continuation of recent markedly higher yields on Italian debt to further increase debt servicing costs, and risks to the deficit path from final application of the Superbonus scheme and from policy slippage, also create some uncertainty around compliance with EU fiscal rules.

Fitch revised its GDP growth forecasts for Italy in September to 0.9% in 2023, 1.0% in 2024 and 1.3% in 2025 (marginally lower average growth than assumed in the NADEF). A key uncertainty is how far absorption of NGEU funds will accelerate after underperforming plans by around 30% this year. Fitch anticipates some greater focus on channelling NGEU funds through the private sector will contribute to improved delivery.

We also slightly increased our assessment of Italy’s trend growth, which is a key ratings weakness, to 0.7% from our previous estimate in 2021 of 0.6%. This reflects a moderately greater contribution from capital deepening, partly due to the scaling-up of EU-supported investment.