EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 7.5.2008 
SEC(2008) 574 final 
  
Recommendation for a 
COUNCIL DECISION 
abrogating Decision 2005/694/EC  on the existence of an excessive deficit in Italy 
(presented by the Commission) 
 
EN 2   EN EXPLANATORY MEMORANDUM  
1. B ACKGROUND  
Article 104 of the Treaty estab lishes that Member States shoul d avoid excessive deficits and 
lays down a procedure for their identification an d correction. The excessive deficit procedure 
(EDP) is further specified in Council Re gulation (EC) No 1467/97 on “speeding up and 
clarifying the implementation of the excessive deficit procedure”1, which is part of the 
Stability and Growth Pact. Acco rding to Article 104(2) of the Treaty, the Commission must 
monitor compliance with budgetar y discipline on the basis of  two criteria, namely: (a) 
whether the planned or actual government defi cit exceeds the reference value of 3% of GDP 
(unless either the deficit ratio has declined substantially and continuously and reached a level 
that comes close to the reference value; or, a lternatively, the excess over the reference value is 
only exceptional and temporary an d the ratio remains close to the reference value); and (b) 
whether government debt exceeds the reference va lue of 60% of GDP (unl ess the debt ratio is 
sufficiently diminishing and approaching the reference value at a satisfactory pace). 
In accordance with the Protocol on the excessive  deficit procedure annexed to the Treaty, the 
Commission provides the data for the implementati on of the EDP. As part  of the application 
of this Protocol, Member States must notify da ta on government deficits and debt and other 
associated variables twice a year, namely before  1 April and before 1 October, in accordance 
with Article 4 of Council Regulation (EC) No 3605/932,3. 
On 7 June 2005, the Commission initiated the ED P for Italy with the adoption of a report 
under Article 104(3), based on a general government  deficit of 3.1% of GDP and government 
debt at around 106-107% of  GDP in both 2003 and 20044. On 28 July 2005, the Council 
decided, on a recommendation from the Commi ssion, that Italy was in excessive deficit 
according to Article 104(6)5. At the same time, and also based on a Commission 
recommendation, the Council addressed recommenda tions under Article 104(7) to Italy with a 
view to bringing the situation of an excessive government de ficit to an end, by 2007 at the 
latest6. Specifically, to that end, the Italian auth orities were recommended to: implement with 
rigour the 2005 budget; take the necessary measures  to ensure a cumulative reduction in the 
cyclically-adjusted deficit, net of one-off and other temporary measures, of at least 1.6% of 
GDP over 2006-2007 relative to its level in 2005, with at least ha lf of this correction taking 
place in 2006. In addition, the Italian authori ties were recommended to ensure that the 
government gross debt ratio dimi nishes sufficiently and approach es the reference value at a 
satisfactory pace, in line with the correction of  the excessive deficit, by restoring in the 
medium term an adequate level of the primary surplus. Furthermore, the Italian authorities 
                                                 
1 OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC) No 1056/2005 (OJ L 174, 
7.7.2005, p. 5). 
2 OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regulation (EC) No 2103/2005 (OJ L 337, 
22.12.2005, p. 1). 
3 The most recent notificatio n of Italy can be found at: 
 http://epp.eurostat.ec.europa.eu/portal/page?_p ageid=2373,58110711&_dad=portal&_schema=portal. 
4 SEC(2005) 750. After successive revisions, the genera l government deficit is currently reported at 3.5% 
of GDP in both 2003 and 2004. For the same years, the debt ratio has been revised downwards to 
around 104% of GDP, essentially due to the present higher estimate of nominal GDP. 
5 OJ L 266, 11.10.2005, p. 57 
6 All EDP-related documents for Italy can be found at the following website:  
http://ec.europa.eu/economy_finance/sg_pact_fiscal_policy/excessive_deficit9109_en.htm. 
 
EN 3   EN were recommended to pay particular attention to  factors other than net borrowing, such as 
below-the-line operations, which c ontribute to the ch ange in debt levels. In addition, the 
Council invited the Italia n authorities to ensure that budg etary consolidation towards the 
medium term position of government finances cl ose to balance or in surplus is sustained 
through a reduction in the cyclic ally-adjusted deficit, net of  one-off and other temporary 
measures, by at least 0.5% of GDP per year af ter the excessive deficit has been corrected. 
Finally, the Council urged the Italian authorit ies to further improve the collection and 
processing of general government data. 
Table 1: Adjustment endorsed by the Council on 28 July 2005  
% of GDP, unless indicated otherwise  2005 2006 2007 
General government balance 
Temporary measures  -4.3 
0.4 deficit clearly < 4 
- deficit clearly < 3 
- 
change in structural balance  +1.6  in 2006-2007 over 2005 (at least) 
at least half of this in 2006 
p.m.: Real GDP growth (%)  0 1.5  1.5 
Note : structural balance = cyclically-adjusted balance excluding one-off and other temporary measures 
Source : Council recommendation und er Article 104(7), quoting the Commi ssion services’ spring 2005 forecast 
and including subsequent evaluations 
On 22 February 2006, i.e. after the expiry of th e deadline for taking acti on set in the Council 
recommendation, the Commission adopted a comm unication to the Council, which concluded 
that action taken until then by Italy seemed to  be consistent with the Council recommendation 
and that, while the budgetary s ituation remained vulnerable, no further steps under the EDP 
were necessary at that stage7. In its meeting of 14 March 2006, the Council concurred with 
this assessment. 
According to Article 104(12), a Council decision on the existence of an excessive deficit is to 
be abrogated, on the basis of a Commission re commendation, when the ex cessive deficit in 
the Member State concerned has, in th e view of the Council, been corrected. 
2. R ECENT DEFICIT DEVELOPMENTS  
Data released by the national statistical office on 29 Februa ry 2008 confirmed the general 
government deficit of 3.5% of GDP in both 2003 and 2004, after successive revisions of the 
original 3.1% of GDP that prompted the Comm ission to initiate the EDP for Italy in 2005. 
The deficit in these two years would have been  even higher in the absence of one-offs, worth 
1¾% and 1¼% of GDP respectively. From almost  5% of GDP at the end of the 1990s, the 
primary surplus fell rapidly to 1.2% in 2004. In 2005, when GDP stagnated, the general 
government deficit attained 4.2%  of GDP, notwithstanding ½% of GDP of deficit-decreasing 
one-offs, and the primary surplus was almost fully eroded. 
                                                 
7 SEC(2006) 238. 
 
EN 4   EN Data reported by Italy before April 2008 show that a significant budgetary adjustment took 
place in 2006, when the general gove rnment deficit reached 3.4% of GDP8. This compares 
with a targeted deficit of 3.5% of GDP se t in the December 2005 update of the stability 
programme9. The headline deficit was negatively affected by the government decision to 
cancel the debt of the railway company related to the high-speed projec t, which resulted in a 
0.9% of GDP increase in the deficit. The almo st 0.9 pp. of GDP nominal adjustment between 
2005 and 2006 was driven by buoyant revenues coupled with a slight reduction in the ratio of 
current primary expenditure to GDP, obtained tha nks to almost flat intermediate consumption. 
This outweighed the mentioned railway debt ca ncellation. The substantial increase in many 
revenue items was related to a number of measures in the 2006 Budget Law and in an 
additional budgetary package adopted at mid- year. VAT receipts, as well as personal and 
corporate income taxes, each rose by 0.3 pp. of GDP year-on-year.  
In 2006, revenues net of one-offs finished at 1½ pp. of GDP higher than in 2005, whereas 
expenditure net of one-offs declined by mo re than ¼ pp. of GDP. Excluding one-off and 
temporary measures10, the 2006 deficit declined to 3% of GDP from 4.8% in 2005. 
In 2006, the structural balance, i.e. the budget balance net of cyclical and one-off effects, 
improved by 1.7 pp. of GDP relati ve to 2005, well above the at least 0.8 pp. required in the 
July 2005 Council recommendation under Article 104(7). 
Based on data provided by the Commission (Euros tat) following the reporting by Italy before 
April 200811, the general government deficit in 2007 wa s at 1.9% of GDP. There is a very low 
probability that potential future revisions in  government accounts would raise the 2007 deficit 
ratio in excess of 3% of GDP12. 
                                                 
8 The 2006 deficit was revised downwards from the 4.4% of GDP notified before April 2008 (Eurostat 
News Release No 55 of 23 April 2007 and No 142 of 22 October 2007). The revision is mainly the 
result of lower capital expenditure du e to the decision to accrue VAT refunds, which are related to the 
ruling issued by the European Court of Justice (ECJ ) on VAT on company cars,  in the years in which 
the filed claims are validat ed, rather than in 2006 as originally planned. 
9 The programme, as well as its assessment by th e Commission and the Council, can be found at: 
http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm. 
10 One-off and temporary measures increased the 2006 deficit by 0.4% of GDP in 2006. On top of the 
deficit-increasing debt cancellation, the following transactions are treated as deficit reducing one-off: sales of real estate (0.1% of GDP) and taxes on the revaluation of companies’ assets (0.4% of GDP). By 
contrast, the 2005 update of the stability programme projected deficit-reducing one-off measures at 
0.3% of GDP in 2006. 
11 Eurostat News Release No 54 of 18 April 2008. 
12 Deficit ratios are usually revised - upwards or downw ards - after the publication of the first outcome in 
the spring notification. Some past revisions in Italy have been quite significant. However, the gap 
between the currently reported deficit for 2007 and the deficit reference value is large enough to suggest 
that any revision should not bring the 2007 deficit above 3% of GDP. 
 
EN 5   EN The 1.9% of GDP deficit reported for 2007, incl uding 0.2% of GDP overa ll deficit-increasing 
one-offs13, is much lower than the 2.8% of GDP targeted in the 2006 stability programme, 
which included 0.1% of GDP of deficit-decreasi ng one-offs. This better-than-planned result is 
due to the positive base effect from the 2006 deficit net-of-one offs, which turned out 1.5 pp. of GDP lower than estimated in the 2006 update of the stability programme. The 
implementation of the corrective measures a dopted with the 2007 Budge t Law was effective; 
however, the better starting position was to some  extent offset by the partial implementation 
of some additional expenditure, mainly social transfers and capital expenditure, which was decided in the course of 2007.  
The 1½ pp. of GDP headline adjustment in 2007 re lative to 2006 was larg ely achieved thanks 
to a further substantial increase, by 1.2 pp., in  the revenue-to-GDP ratio. A surge in both 
personal and corporate income taxes largely offset the reduction in both the temporary 
revenue, stemming from the revalu ation of company assets, and the indirect taxes/GDP ratio, 
mainly due to a decline of excise duties on o il products. The diversion of the severance pay 
scheme TFR to the Italian social security instit ute explains almost 0.4 pp. of the rise in social 
contributions as a share of GDP
14. On the expenditure side, substantially lower (one-off) 
capital expenditure relative to 2006 was partly o ffset by the surge in interest expenditure. The 
share of current primary expenditure to GDP decreased marginally between 2006 and 2007, 
as subdued growth of compensation of employ ees, reflecting the absence of the sizeable 
arrears paid in 2006, was largely co mpensated by an increase of so cial transfers other than in 
kind. Overall, primary expenditure fell by almost ¾ of a percentage poin t of GDP, while total 
expenditure declined by around ¼ of a percentage point of GDP in 2007.  
In 2007, revenues net of one-offs increased by 1½ pp. of GDP compared with 2006, whereas 
expenditure net of one-offs rose by more than  ¼ pp. of GDP. Excluding this and other one-off 
and temporary measures, the 2007 deficit was 1.7% of GDP. 
The structural balance, i.e. the cyclically  adjusted budgetary balance excluding one-off 
measures, is estimated to have improved by about 1¼ percentage points of GDP in 2007. 
Over the 2006-2007 period, the correction of the st ructural deficit amoun ted to 3 pp. of GDP. 
This exceeds by a comfortable margin the at  least 1.6 pp. required by the July 2005 Council 
recommendation under article 104(7). 
                                                 
13 The 0.2% of GDP estimate of the deficit-increasing im pact of one-off measures in 2007 is the result of 
0.2% of GDP deficit-decreasing one-offs, comprising proceeds from the sale of real estate and taxes on 
the revaluation of company assets, and the 0.4% deficit-increasing one-offs, which consisted of (i) the 
decision, adopted on 31/12/2007, to discontinue the obligation on tax collectors to advance to government the payment of a certain amount of taxes to be collected in the following year (0.3% of 
GDP); and (ii) reimbursement claims filed by taxpayers following the ECJ ruling against Italy's VAT 
regime for company cars (l ess than 0.1% of GDP). 
14 The 2007 Budget Law ruled that em ployers with at least 50 employees should divert the severance pay 
scheme ( Trattamento di Fine Rapporto  – TFR) flows that employees deci de not to transfer to private 
pension schemes towards a new scheme set up within the Italian social security institute ( Istituto 
Nazionale della Previdenza Sociale  - INPS). The flows accumulated in the new INPS scheme are 
recorded as government revenue that reduces the deficit, but the liabilities they generate for the government in the form of severance payments to employees will gradually translate into additional 
public expenditure. The deficit-reducing impact of this provision is projected to decrease over time, and 
within 8-9 years additional revenue and ex penditure are expected to balance out. 
 
EN 6   EN In line with the invitation in the Council recommendation unde r Article 104(7) that Italy 
further improve the collection and processing of  general government data, Italy has reduced 
statistical discrepancies. The de velopment of online government is leading to a more efficient 
collection of information on budgetary transac tions. Some shortcomings remain, like for 
instance a significant discrepancy between accrued and collected social contributions in 2006 
and 2007, Following the September 2005 EDP notificat ion, Eurostat published Italy's data 
with no pending issues. 
3. D EFICIT PROJECTIONS FOR 2008  AND BEYOND  
According to the Commission services' spring  2008 forecast, the gene ral government deficit 
for 2008 is projected to increase to 2.3% of GDP,  with real GDP growing at 0.5%. Net of one-
off and temporary measures, i. e., proceeds from the sale of real assets and the final 
instalments of some one-off taxes, the 2008 deficit would still be below the reference value, at 
2.4% of GDP. In the November 2007 update of th e stability programme of  Italy, the official 
deficit objective for 2008 was 2.2% of GDP, al so including around 0.1% of GDP of deficit-
decreasing one-offs. Despite the better-than-esti mated 2007 deficit outturn, the official deficit 
projection for 2008 was revised upwards on 12 Marc h, to 2.4% of GDP, la ter confirmed in the 
April 2008 notification. The revisi on incorporates lower expected  real GDP growth (0.6% as 
compared to 1.5% of GDP in the update), but also budgetary slippages.  The slightly lower 
projection for the 2008 deficit in the spring foreca st is explained by the assumption that some 
delays will continue to be experienced in th e budgetary execution of investments. The spring 
forecast also projects lower interest expenditure. 
The 2.3% of GDP deficit in 2008 in the Comm ission services spring 2008 forecast would 
represent a rise in nominal terms close to ½ of a percentage point of GDP compared to 2007, 
despite the sharp drop of capital expenditu re, which reflects the substantial one-off 
expenditure accrued in 2007. The projected worsen ing in the nominal defi cit reflects not only 
lower economic growth, but also  the negative budgetary impact of the 2008 budget, as well as 
some expansionary measures originally planne d in 2007 and others adopted in the first few 
months of 2008. Specifically, the 2008 budget envi sages the financing of  the public sector 
wage agreement at local level for the pe riod 2006-2007, including the due arrears (in the 
official projections, the wage bill increases by mo re than 6% in 2008 and slightly declines in 
2009), cuts in local property taxes, lower revenu e due to rent deductibility and some increase 
of unemployment benefits. The budget law also s tipulates a reform of both the tax rates on 
corporate income (IRES) and the regional tax on productive activity (IRAP), the budgetary 
impact of which would turn from positive in 2008 to negative in 2009, before becoming neutral in the following years. Some additional social transfers and investments approved in 
2007, as well as cuts in IRAP in the 2006 budget law, will have a delayed adverse budgetary impact in 2008. A number of minor measures involving additional expenditure and lower 
revenue were adopted by Parliament in February 2008. Overall, in 2008, expenditure net of one-offs should increase by 0.5 pp. of GDP, as a mode st decline in the ratio of both interest 
expenditure and capital expenditu re net of one-offs would be mo re than offset by a surge of 
current primary expenditure. Revenues net of one-offs should decline by almost 0.2 pp. of 
GDP in 2008. 
 
EN 7   EN Under unchanged policies, risks to the budgetary projections for 2008 emanate from pending 
court rulings, in particular concerning the non- deductibility of IRAP fr om the tax base of 
income taxes. Risks also arise from the econom ic growth outlook. In addition, the outcome of 
the substantial changes in corporate taxation is  subject to considerable uncertainty in both 
directions. 
For 2009, the Commission services spring 2008 for ecast, based on the conventional no-policy 
change scenario and real GDP growth at 0.8%, envisages that the general government deficit 
will rise slightly to 2.4% of GDP. This projec ted modest increase is driven by a falling tax 
burden, particularly lower corporate income taxe s, as a result of both discretionary measures 
and the negative economic cycle. The November 2007 update of the stability programme targeted a deficit of 1.5% of GDP, with real  GDP growing by 1.6%. As highlighted in the 
Council Opinion on the 2007 update of the Italian stability programme
15, no corrective 
measures underlying the budgetary adjustment  were spelled out in the programme. 
The projected deterioration of the structural  position in 2008 compared to 2007, by more than 
¼ of a percentage point of GDP, is clearly not in lin e with the at least 0.5% of GDP annual 
reduction that is stipulated in  the Stability and Growth Pact  and recalled in the Council 
decision under Article 104(7) after the excessive deficit has been corrected. In its opinion on 
the November 2007 update of the stability progr amme, which projected an improvement in 
the structural position of ¼ pp. of GDP in 2008, th e Council noted that the structural balance 
risked deteriorating substa ntially in 2008, unless the better-than-proj ected 2007 starting 
position was carried through and concluded that the MTO might not be achieved by 2011 as 
planned in the programme. Accordingly, the Counc il invited Italy to strengthen the budgetary 
target for 2008, so as to secure an ambitious adjustment, and implement the planned fiscal consolidation thereafter, with specified measur es to ensure adequate progress towards the 
MTO, so as to achieve it within  the programme period, i.e. 2011. 
4. D
EBT DEVELOPMENTS AND PROJECTIONS  
Data released by the national statistical office on 29 February 2008 showed a general 
government debt at around 104% of GDP in both 2003 and 2004, after successive revisions of 
the original 106-107% of GDP th at was observed at the time the EDP for Italy was initiated 
essentially due to a higher estimate of th e GDP level. In 2005, the debt-to-GDP ratio 
increased for the first time in a decade, by 2 pp. Primary surplus provided almost no 
contribution to its reduction whereas, due to sluggish economic growth, the implicit interest rate on government debt largely exceeded nominal GDP growth, implying a significantly negative "snow ball" effect. The government de bt ratio increased again in 2006 despite an 
increasing primary surplus and a less negative "snow  ball' effect. In that year the "stock-flow" 
adjustment provided a particularly negative co ntribution to debt development, essentially 
because of the accumulation of liquid assets to  finance the estimated VAT reimbursements 
following the ECJ ruling on VAT on company cars  (see Footnote 8). In 2007, the government 
debt-to-GDP ratio decreased by 2.5 pp., to 104% of GDP, back to the level recorded in 2004. 
This result was achieved thanks to an increa sed primary surplus exceeding 3% of GDP. The 
"stock-flow" adjustment also contributed to the fall in the debt ratio as state liquid assets were reduced substantially at the end of 2007 relative to th e previous year given the much smaller-
than-anticipated amount of VAT  reimbursements actually claimed by taxpayers. In addition, 
                                                
 
15 OJ C 49, 22.2.2008, p. 49. 
 
EN 8   EN the "stock-flow" adjustment in 2007 benefite d from a distribution of capital amounting to 
around 0.2% of GDP by a state- owned company (SACE SpA). 
The debt reduction over 2006-200 7, based on an increasing primary surplus and without 
significant debt-increasing operations below the li ne, appears in line with the correction of the 
excessive deficit. However, as the primary surp lus is projected to fall in 2008 and measures to 
raise it again in the medium-term have not been spelled out, th e debt ratio is expected to 
decline only slightly in 2008 and 2009 (on a no-policy change basis). 
The Commission services' spring 2008 forecast, based on the no-policy change assumption, 
projects a continued reduction in the govern ment debt ratio in 2008 and 2009, albeit at a 
slower pace due to a wors ening primary surplus and di smal economic growth. Risks 
associated with economic growth  and budgetary developments al so apply to the debt-to-GDP 
ratio. 
5. C ONCLUSIONS  
The general government deficit increased fr om 3.5% of GDP in 2003 and 2004 to 4.2% of 
GDP in 2005. It then declined to 3.4% of GDP in 2006 and 1.9% in 2007, below the 3% of 
GDP reference value. The measures underlying th e deficit reduction are mainly permanent in 
nature. Indeed, the deficit in 2006 and 2007 woul d have been even lowe r in the absence of 
one-offs. The structural balance, i.e. the cyclic ally-adjusted balance net of one-off and other 
temporary measures, improved by 3 pp. of GDP during 2006-2007, well above the fiscal 
effort of at least 1.6 pp. of GDP recommended by the Council. According to the Commission 
services’ spring 2008 forecast, the nominal deficit is expected to increase to 2.3% of GDP in 
2008 (still including one-offs amounting to ab out 0.1% of GDP, without which the deficit 
would nonetheless still be belo w 3% of GDP) and, on a no-polic y change basis, to 2.4% in 
2009. This indicates that the de ficit has been brought below th e ceiling of 3% of GDP in a 
credible and sustainable manner. 
After decreasing for a decade to just below 104% of GDP in 2004 (from more than 121% of 
GDP in 1994), the government debt ratio increas ed by 2 percentage points of GDP in 2005 
and by further 0.6 of a percentage  point in 2006. The de bt ratio fell again to 104% of GDP in 
2007. The development of the debt ratio wa s significantly affected by a temporary 
debt-increasing financial operation in 2006 and it s reversal in 2007. Without  this operation the 
debt ratio would have remained broadly stab le in 2006, reflecting the improvement in the 
primary surplus in line with the Council recommendation. According to the Commission's 
spring 2008 forecast, under the assumption of uncha nged policies the debt ra tio is projected to 
fall to around 102½% by 2009. The debt ratio can be  considered to have diminished in line 
with the correction of the excessive deficit in 2007.  
From an overall assessment, it follows that the excessive deficit situation in Italy has been 
corrected. Accordingly, the Commission recomme nds that the Council abrogates its decision 
on the existence of an ex cessive deficit in Italy.  
 
EN 9   EN Table 2: Budgetary developments, 2003-2009 
2007 2008 2009 % of GDP, unless indicated otherwise 2003 2004 2005 2006 
outturn SP (2) COM SP (2) COM(3)SP(2) 
General government balance -3.5 -3.5 -4.2 -3.4 -1.9 -2.4 -2.3 -2.2 -2.4 -1.5 
        (-2.4)    
- Total revenues(5) 44.8 44.2 43.8 45.4 46.6 46.2 46.4 46.3 46.4 45.9 
- Total expenditure(5) 48.3 47.7 48.0 48.8 48.5 48.6 48.7 48.5 48.7 47.9 
Of which: - interest expenditure 5. 1 4.7 4.5 4.6 5.0 4. 8 4.9 4.9 4.9 4.9 
        (5.0)   
- gross fixed capital formation 2.5 2.4 2.4 2.4 2.4 2. 7 2.4 2.5 2.4 2.6 
Primary balance 1.6 1.2 0.3 1.3 3.1 2.5 2.6 2.6 2.5 3.4 
        (2.6)    
One-off and temporary measures 1.7 1.3 0.6 -0.4 -0.2 0.2 0.1 0.1 0.0 0.1 
Structural balance(1) -5.1 -4.7 -4.5 -2.8 -1.5 -2.2 -1.9 -2.0 -1.6 -1.3 
        (-2.2)    
Structural primary balance(1) 0.0 0.0 0.0 1.8 3.5 2.6 3.1 2.9 3.3 3.6 
Government gross debt(4) 104.3 103.8 105.8 106.5 104.0 105.0 103.2 103.5 102.6 101.5 
        (103.0)    
Change in debt ratio (a) = (b) + (c) + (d) -1.3 -0.5 2.0 0.6 -2.5 -1.8 -0.8 -1.6 -0.6 -2.0 
Contributions: - primary balance (b) -1.6 -1.2 -0 .3 -1.3 -3.1 -2.5 -2.6 -2.6 -2.5 -3.4 
- “snow ball” effect (c) 1.9 0.5 1.9 0.9 1.1 0.1 1.5 0.9 2.0 1.5 
- stock-flow adjustment (d) -1.6 0.3 0.5 1.0 -0.5 0.6 0.4 0.2 -0.1 -0.1 
Pm Real GDP growth (%) 0.0 1.5 0.6 1.8 1.5 1.9 0.5 1.5 0.8 1.6 
        ( 0 . 6 )    
Pm Output gap -0.2 0.0 -0.6 -0.3 -0.3 -0.6 -1.0 -0.6 -1.6 -0.6 
(1) Cyclically-adjusted (primary) balance excluding one-off and temporary measures. 
(2) Cyclically-adjusted and structural balances and output gaps according to the programme as calculated by 
Commission services on the basis of the information in the programme. 
(3) No-policy change assumption. 
(4) The change in the gross debt ratio can be decomposed as follows: 
 
tt
tt t
tt
tt
tt
tt
YSF
yyi
YD
YPD
YD
YD+⎟⎟
⎠⎞
⎜⎜
⎝⎛
+−+=−
−−
−−
1*
11
11 
 where t is a time subscript; D, PD, Y  and SFare the stock of government debt, the primary deficit, nominal GDP 
and the stock-flow adjustment respectively, and i and yrepresent the average cost of debt and nominal GDP 
growth. The term in parentheses represents the “snow ball” effect. 
(5) Budgetary data provided in the SP for 2009 are trends based on unchanged legislation. In order to achieve the targeted general government balance, additional measures with a positive impact of 0.4% of GDP were envisaged.
Sources: Commission services’ spring 2008 for ecast (COM)and November 2007 update of the stability pr ogramme (SP) (in 
brackets new official projections based on unchanged legislation of March 2008). 
 
 
 
EN 10   EN Recommendation for a 
COUNCIL DECISION 
abrogating Decision 2005/694/EC  on the existence of an excessive deficit in Italy 
THE COUNCIL OF THE EUROPEAN UNION, 
Having regard to the Treaty establishing th e European Community, and in particular 
Article 104(12) thereof, 
Having regard to the recomm endation from the Commission, 
Whereas: (1) By Council Decision 2005/694/EC
16, following a recommendation from the 
Commission in accordance with Article 104(6) of the Treaty, it was decided that an 
excessive deficit existed in Italy. The Council noted that th e general government 
deficit was above but close to the 3% of  GDP reference value in both 2003 and 2004, 
while general government gross debt stood at around 106-107 % of GDP in both years, clearly above the 60 % of GDP Treaty reference value, and it had not declined 
at a satisfactory pace over recent years. 
(2) On 28 July 2005, in accordance with Article 104(7) of the Treaty and Article 3(4) of 
Council Regulation (EC) No 1467/97 of 7 Ju ly 1997 on speeding up and clarifying the 
implementation of the excessive deficit procedure
17, the Council made, based on a 
recommendation from the Commission, a r ecommendation addressed to Italy with a 
view to bringing the excessive deficit situation to an end by 2007 at the latest. The 
recommendation was made public. 
(3) In accordance with Article 104(12) of the Treaty, a Council Decision on the existence 
of an excessive deficit is to be abrogate d when the excessive deficit in the Member 
State concerned has, in the view of the Council, been corrected.  
(4) In accordance with the Protocol on the excessive deficit pro cedure annexed to the 
Treaty, the Commission provides the data for the implementa tion of the procedure. As 
part of the application of this Protocol , Member States are to notify data on 
government deficits and debt and other a ssociated variables tw ice a year, namely 
before 1 April and before 1 October, in  accordance with Article 4 of Council 
Regulation (EC) No 3605/93 of 22 November  1993 on the application of the Protocol 
                                                 
16 OJ L 266, 11.10.2005, p. 57. 
17 OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC) No 1056/2005 (OJ L 174, 
7.7.2005, p. 5). 
 
EN 11   EN on the excessive deficit procedure annexed to the Treaty establishing the European 
Community18. 
(5) Based on data provided by the Commission (Eurostat) in accordance with Article 
8g(1) of Regulation (EC) No 3605/93 following the notification by It aly before 1 April 
2008 and on the Commission services’ spring 2008 forecast, the following conclusions 
are warranted:  
– the general government defi cit, after rising from 3.5 % of GDP in 2004 to 4.2% 
of GDP in 2005, was reduced to 3.4% of GDP in 2006 and finally to 1.9 % of 
GDP in 2007, which is below the 3% of GDP deficit reference value. Net of 
the budgetary impact of one-off measures, the deficit would be  1.7% of GDP in 
2007. This compares with a target of  2.8% of GDP set in the December 2006 
update of the stab ility programme,  
– the adjustment was driven by an increase in permanent tax revenues over the 
2006-2007 period, which largely exceeded expectations. This was mostly thanks to a higher-than-expected effectiveness of the adopted measures and somewhat higher-than-projected ec onomic growth. After an estimated 
worsening by ¼ of a percentage point of GDP in 2005, the structural balance 
(i.e. the cyclically-adjusted balance net of one-off and other temporary 
measures) is estimated to have impr oved by 1¾ and 1¼ percentage points of 
GDP in 2006 and 2007, respectively, 
– for 2008, the spring 2008 forecast projects an increase in the deficit to 2.3% of 
GDP, including 0.1% of GDP one-offs proceed s from the sale of real estate. 
The envisaged worsening of the budgetary balance will be driv en by both a rise 
in the ratio of current primary expend iture to GDP and lower current taxes. 
This is partly offset by an anticipated decline of capital expenditure, which reflects the substantial one-off expe nditure accrued in  2007. Although the 2.3% 
of GDP deficit projection is  only slightly above the o fficial deficit target of 
2.2% of GDP set in the November 2007 upda te of the stability programme, the 
latter was projected using an estimated  deficit outturn in 2007 significantly 
higher than the reported outcome. For 2009, the spring forecast projects, on a 
no-policy change basis, a deficit of 2.4% of GDP. This implies that the deficit 
has been brought below the 3% of GDP ceiling in a credible and sustainable manner. The structural balance is proj ected to worsen by more than ¼ of a 
percentage point of GDP in 2008 and, on a no-policy ch ange basis, to improve 
by ¼ of a percentage point in 2009. This has to be seen against the need to 
make progress towards the medium-term objective (MTO) for the budgetary position, which for Italy is a balanced position in structural terms, 
                                                
 
18 OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regulation (EC) No 2103/2005 (OJ L 337, 
22.12.2005, p. 1). 
 
EN 12   EN – after decreasing for a decade to just below 104% of GDP in 2004 (from more 
than 121% of GDP in 1994), the govern ment debt ratio increased by 
2 percentage points of GDP in 2005 and by further 0.6 of a per centage point in 
2006, to 106½% of GDP. The debt ratio fell again to 104% of GDP in 2007. 
The development of the debt ratio was significantly affected by a temporary 
debt-increasing financial ope ration, i.e. the accumula tion of liquid assets, in 
2006 and its reversal in 2007. Without this  operation the debt ratio would have 
remained broadly stable in 2006, reflec ting the improvement in the primary 
surplus in line with the Council recommendation. According to the 
Commission's spring 2008 forecast, under the assumption of unchanged policies the debt ratio is  projected to fall to around 102½% by 2009. The debt 
ratio can be considered to have diminished in line with the correction of the excessive deficit in 2007.  
(6) In the view of the Council, the excessive  deficit in Italy ha s been corrected and 
Decision 2005/694/EC
 should therefore be abrogated. 
HAS ADOPTED THIS DECISION:  
Article 1 
From an overall assessment it follows that the excessive deficit situation in Italy has been 
corrected. 
Article 2 
Decision 2005/694/EC is hereby abrogated. 
Article 3 
This Decision is addressed to the Republic of Italy.  
Done at Brussels, 
 For the Council 
 The President