Italy announces $24 billion in tax cuts and wage hikes to stimulate faltering growth

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Italian Prime Minister Giorgia Meloni plans to spend €24 billion on tax cuts and public sector pay rises next year to stimulate consumption and support faltering growth, despite investor concerns about the country’s finances.

After his Cabinet approved next year’s budget on Monday, Meloni said his three-party, right-wing coalition was working to fulfill promises made during last year’s elections, despite pressure on public finances. .

It is a budget that I consider very serious, very realistic, a budget that… concentrates resources on some major priorities, said Meloni. Our first priority is to defend the purchasing power of families.

Giancarlo Giorgetti, Minister of Finance, called the budget solid, adding that he was confident that, once the details were read, it would be positively approved in Europe and by the markets.

Italy announced last month that it would increase its fiscal deficit target for next year to 4.3% of gross domestic product, up from 3.7% set in April, and that it would not reach the fiscal deficit limit imposed by EU of less than 3 percent. percent of GDP by 2026.

That announcement, which Fitch Ratings called a significant loosening of fiscal policy, caused the yield on Italy’s benchmark 10-year bond to rise above 5% for the first time since Europe’s sovereign debt crisis 11 years ago. , although it has since fallen.

Investors appeared indifferent to Meloni’s latest economic plans, with the yield on Italian 10-year bonds rising just 0.7 basis points to 4.77 percent. However, markets’ concern about Rome’s finances has increased in recent weeks, with the difference between Italy’s borrowing costs and Germany’s rising from 171 basis points a month ago to almost 200 basis points.

Both Meloni and Giorgetti said Rome’s room for maneuver was limited by the European Central Bank’s recent interest rate hikes, which will cost Italy an additional 13 billion in annual interest payments.

Despite the restrictions, Italy will spend €10 billion to extend last years’ cut in workers’ mandatory social payments such as pension contributions, keeping an additional €100 billion a month in the hands of around 14 million workers.

Italy will also spend €4.3 billion to reduce income taxes on low- and middle-income workers, with the first 28,000 earners being taxed at a flat rate of 23%. Rome also allocated 7 billion for public sector salary increases, of which 2.5 billion. is for workers in the healthcare sector. Increasing funding for salaries of police and other security services was the next priority.

The Melonis coalition will spend billions of dollars on new initiatives to encourage Italian women to have more children, as it seeks to reverse a demographic trend that has seen the birth rate in recent years reach its lowest level since unification in 1861. In addition to an additional month of paid parental leave and free childcare leave for a second child, Rome will begin making pension contributions on behalf of working women who have two young children or more.

A woman who gives birth to at least two children… has already made an important social contribution, said Meloni. This measure helps counter the narrative that favoring childbirth discourages women from working. The two things can go together.

To help finance these new measures, Giorgetti said the government would cut around 5.5 billion euros in expenses across various ministries and local administrations.

The draft budget, which has not yet been approved by parliament, also aims to increase revenues through the partial sale of state assets such as the country’s oldest bank, Monte dei Paschi, and state airline ITA.

Melonis’ government predicted Italian GDP growth would be 1.2 percent next year. This compares with an IMF estimate from last week of 0.7 percent. The Bank of Italy forecasts an expansion of 0.8 percent for 2024.

However, analysts see risks, especially if the conflict between Israel and Hamas turns into a wider war in the Middle East.

Rome’s decision to slow down the pace of fiscal consolidation could also put it on a collision course with Brussels, analysts warn.

Additional reporting by Giuliana Ricozzi in Rome and Martin Arnold in Frankfurt