Weekly Analysis

This has been a topical week in Italy, as the government approved the Budget Law and the electoral law passed the first confidence vote in the House of Representatives.......

The two bills should be passed on to the Senate already next week.

In Italy, on Monday 16 October the government approved the Budget Law for 2018.

As we write, the Draft Budgetary Plan sent to the EU Commission has been disclosed, whereas the full text of the budget law is still not available (it will have to be brought before Parliament by 20 October). The gross budget is worth 20.4 billion (1.2% of GDP), although the lion’s share (80% of measures) is allocated to deactivating the safeguard clauses (automatic hikes in indirect taxes envisaged by previous budgets), at an expense of 15.7 billion euros. Net of the clauses, the stimulus package is therefore worth 4.7 billion euros.

The main measures (some of which included in the related fiscal decree) are:

1) cost items at constant policies (2.6 billion in 2018, 3 billion in full swing), the most important of which is the renewal of public sector labour contracts;

2) measures in support of social cohesion and the fight against poverty (at least 600 million in 2018, on the rise to 900 million in 2019, and 1.2 billion in 2020), i.e. a strengthening of the “inclusion income” (300 million) and new forms of early retirement;

3) de-contribution by up to 50% for three years on the unlimited hiring of young adults of up to 35 years of age (worth 300 million in 2018, and up to 800 million in 2019 and 1.2 billion in 2020), and stabilisation of de-contribution incentives on hiring in Southern Italy;

4) additional public investments worth 300 million in 2018 (and up to 1.3 billion in 2019 and 1.9 billion in 2020);

5) refinancing of the guarantee fund for small and medium enterprises and creation of a new 300 million euro fund in support of large, crisis-stricken businesses;

6) extension into 2018 as well of the super-amortisation of new machinery and the hyper-amortisation of investments in digitalisation, as well of the “green” bonuses. Funding will amount to 9.5 billion, of which around two thirds from higher revenues.

The government is mostly betting on the fight against tax evasion, extending previously tested measures such as electronic invoicing and split payment. The reopening of the Equitalia tax bill “scrapping” programme is also on the cards, as well as the resolution of pending tax disputes at a discount. Additional revenues will also come from the new auction of 5G frequencies and the postponement of the new reduced corporate tax (over 2 billion). For what concerns spending cuts, the DBP generically mentions the “reprogramming of transfers to various agencies” and a new spending review process. 

In a nutshell, the budget is expansionary by 0.6% of GDP, considering the deactivation of the automatic increase in indirect taxes, but restrictive by 0.3% net of the clauses (which were not priced into the expectations of economic agents, as the government had repeatedly affirmed its intention to sterilize them).

Therefore, the budget is slightly restrictive in net terms, but will have an essentially neutral impact on growth in 2018 (or at most -0.1% of GDP), considering that the multiplier of stimulus measures is higher than the funding multiplier. However, 2018 will bring a structural correction of 0.3% of GDP (as implicitly obtained at the EU level, compared to a theoretical adjustment of 0.6%), but fiscal policy will be expansionary on the whole, when considering the change in the cyclically-adjusted primary surplus (down from 2.9% to 2.6%).

In any case, we believe the 2018 targets set by the government for the deficit, at 1.6%, and debt, at 130% of GDP, are at risk. The fact that some tax measures may be classified as one-off, the lack of details on spending cuts and the optimistic GDP assumptions, represent critical aspects of the budget in view of the first view opinion due from the EU, in November.

In the meantime, on 15 October the House approved the electoral law, known as “Rosatellum 2.0”, with 375 votes in favour and 215 against.

The law could be examined by the Senate on Tuesday 24, and be voted on Wednesday 25 or Thursday 26, before the Budget Law is brought before Parliament. The government may again impose a confidence vote in the Senate (where, different from the Chamber, no secret ballot is forecast), in order to speed up the process (after the approval of the law, the government will have 30 days to issue a decree to redefine the single-candidate constituencies).

In our view, if the law is approved, the risk of ungovernability would be smaller than is the case with the current system (almost entirely proportional, and different for the two Houses of Parliament).

Therefore, in the next few weeks the electoral law and the Budget Law will cross paths in Parliament. It is reasonable to assume that both laws could be approved by year-end (albeit probably supported by different majorities), which could lead to Parliament being dissolved at the turn of the year, and elections following in March.

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