Italy overperforms on fiscal deficit targets and entering virtuous cycle

Italy has been outperforming on its deficit targets and is entering a virtuous cycle, but it still needs structural reforms for faster growth, the head of the International Monetary Fund's European department Alfred Kammer said.

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A souvenir shop fronts a monument in Rome, Italy. Italy is also considering hiking to 300,000 euros the threshold above which non-domiciled residents will no longer be able to pay a flat tax on income they transfer into their residence to Italy, one of the measures.

(Reuters)

Italy cut its budget deficit to 3.4% of GDP last year, from 8.9% in 2021, and the gap is to shrink to 2.9% of GDP in 2026.

"What Italy has been doing is it actually has been overperforming on its targets with regard to the EU fiscal rules," Kammer told Reuters.

"The positive thing about this overperformance, which they should keep up, is that you go into a virtuous cycle, because they lower your spreads, that lowers your interest rate, that gives impetus for private sector borrowing, for private sector investment, for growth, which generates tax revenue, so that actually helps you on the consolidation side," he said.

The spread of Italian IO-year bonds over their German equivalent has fallen to around 80 basis points, from nearly 250 bps in mid-2022.

"Italian policymakers have very well understood that it is very costly to be in a situation where people are questioning your fiscal sustainability," Kammer said. "I think various Italian governments have focused on making sure that this is not being questioned."