Recommendation for a Council Decision abrogating Decision 2005/694/EC on the existence of an excessive deficit in Italy
Date: 2008-05-07
Institutions: European Commission
Subjects: Italy, budget deficit, public debt, public finance, stability pact

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COMMISSION OF THE EUROPEAN 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) 

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EXPLANATORY MEMORANDUM 

1. 

BACKGROUND 

Article 104 of the Treaty establishes that Member States should avoid excessive deficits and 
lays down a procedure for their identification and correction. The excessive deficit procedure 
(EDP)  is  further  specified  in  Council  Regulation  (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. According to Article 104(2) of the Treaty, the Commission must 
monitor  compliance  with  budgetary  discipline  on  the  basis  of  two  criteria,  namely:  (a) 
whether the planned or actual government deficit 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, alternatively, the excess over the reference value is 
only  exceptional  and  temporary  and  the  ratio  remains  close  to  the  reference  value);  and  (b) 
whether government debt exceeds the reference value of 60% of GDP (unless 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 implementation of the EDP. As part of the application 
of this Protocol, Member States must notify data 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  EDP  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  Commission,  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 recommendations under Article 104(7) to Italy with a 
view  to  bringing  the  situation  of  an  excessive  government  deficit  to  an  end,  by  2007  at  the 
latest6. Specifically, to that end, the Italian authorities 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 half of this correction taking 
place  in  2006.  In  addition,  the  Italian  authorities  were  recommended  to  ensure  that  the 
government  gross  debt  ratio  diminishes  sufficiently  and  approaches  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 

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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). 
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). 
The most recent notification of Italy can be found at: 
http://epp.eurostat.ec.europa.eu/portal/page?_pageid=2373,58110711&_dad=portal&_schema=portal. 
SEC(2005) 750. After successive revisions, the general 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. 
OJ L 266, 11.10.2005, p. 57 
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. 

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were  recommended  to  pay  particular  attention  to  factors  other  than  net  borrowing,  such  as 
below-the-line  operations,  which  contribute  to  the  change  in  debt  levels.  In  addition,  the 
Council  invited  the  Italian  authorities  to  ensure  that  budgetary  consolidation  towards  the 
medium  term  position  of  government  finances  close  to  balance  or  in  surplus  is  sustained 
through  a  reduction  in  the  cyclically-adjusted  deficit,  net  of  one-off  and  other  temporary 
measures, by at least 0.5% of GDP per year after the excessive deficit has been corrected. 

Finally,  the  Council  urged  the  Italian  authorities  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 

-4.3 

deficit clearly < 4 

deficit clearly < 3 

Temporary measures 

0.4 

- 

- 

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 under Article 104(7), quoting the Commission services’ spring 2005 forecast 
and including subsequent evaluations 

On 22 February 2006, i.e. after the expiry of the deadline for taking action set in the Council 
recommendation, the Commission adopted a communication 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 situation 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  recommendation,  when  the  excessive  deficit  in 
the Member State concerned has, in the view of the Council, been corrected. 

2. 

RECENT DEFICIT DEVELOPMENTS 

Data  released  by  the  national  statistical  office  on  29  February  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  Commission  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. 

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SEC(2006) 238. 

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Data  reported  by  Italy  before  April  2008  show  that  a  significant  budgetary  adjustment  took 
place  in  2006,  when  the  general  government  deficit  reached  3.4%  of  GDP8.  This  compares 
with  a  targeted  deficit  of  3.5%  of  GDP  set  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 project, which resulted in a 
0.9% of GDP increase in the deficit. The almost 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 thanks to almost flat intermediate consumption. 
This  outweighed  the  mentioned  railway  debt  cancellation.  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  more  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 relative 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 (Eurostat) following the reporting by Italy before 
April 200811, the general government deficit in 2007 was 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. 

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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 due 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 validated, rather than in 2006 as originally planned. 
The  programme,  as  well  as  its  assessment  by  the  Commission  and  the  Council,  can  be  found  at: 
http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm. 
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. 
Eurostat News Release No 54 of 18 April 2008. 
Deficit ratios are usually revised - upwards or downwards - 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. 

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The 1.9% of GDP deficit reported for 2007, including 0.2% of GDP overall 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-decreasing 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 adopted with the 2007 Budget 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 relative to 2006 was largely 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 revaluation of company assets, and the indirect taxes/GDP ratio, 
mainly due to a decline of excise duties on oil products. The diversion of the severance pay 
scheme TFR to the Italian social security institute explains almost 0.4 pp. of the rise in social 
contributions  as  a  share  of  GDP14.  On  the  expenditure  side,  substantially  lower  (one-off) 
capital expenditure relative to 2006 was partly offset 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  employees,  reflecting  the  absence  of  the  sizeable 
arrears paid in 2006, was largely compensated by an increase of social transfers other than in 
kind. Overall, primary expenditure fell by almost ¾ of a percentage point 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 structural deficit amounted 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). 

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The 0.2% of GDP estimate of the deficit-increasing impact 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 (less than 0.1% of GDP). 
The 2007 Budget Law ruled that employers with at least 50 employees should divert the severance pay 
scheme (Trattamento di Fine Rapporto – TFR) flows that employees decide 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 expenditure are expected to balance out. 

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In  line  with  the  invitation  in  the  Council  recommendation  under  Article  104(7)  that  Italy 
further improve the collection and processing of general government data, Italy has reduced 
statistical discrepancies. The development of online government is leading to a more efficient 
collection  of  information  on  budgetary  transactions.  Some  shortcomings  remain,  like  for 
instance a significant discrepancy between accrued and collected social contributions in 2006 
and  2007,  Following  the  September  2005  EDP  notification,  Eurostat  published  Italy's  data 
with no pending issues. 

3. 

DEFICIT PROJECTIONS FOR 2008 AND BEYOND 

According to the Commission services' spring 2008 forecast, the general 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 the stability programme of Italy, the official 
deficit objective for 2008 was 2.2% of GDP, also including around 0.1% of GDP of deficit-
decreasing one-offs. Despite the better-than-estimated 2007 deficit outturn, the official deficit 
projection for 2008 was revised upwards on 12 March, to 2.4% of GDP, later confirmed in the 
April 2008 notification. The revision 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 forecast is explained by the assumption that some 
delays will continue to be experienced in the budgetary execution of investments. The spring 
forecast also projects lower interest expenditure. 

The  2.3%  of  GDP  deficit  in  2008  in  the  Commission  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  expenditure,  which  reflects  the  substantial  one-off 
expenditure accrued in 2007. The projected worsening in the nominal deficit reflects not only 
lower economic growth, but also the negative budgetary impact of the 2008 budget, as well as 
some  expansionary  measures  originally  planned  in  2007  and  others  adopted  in  the  first  few 
months  of  2008.  Specifically,  the  2008  budget  envisages  the  financing  of  the  public  sector 
wage  agreement  at  local  level  for  the  period  2006-2007,  including  the  due  arrears  (in  the 
official projections, the wage bill increases by more than 6% in 2008 and slightly declines in 
2009), cuts in local property taxes, lower revenue due to rent deductibility and some increase 
of  unemployment  benefits.  The  budget  law  also  stipulates  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 modest decline in the ratio of both interest 
expenditure and capital expenditure net of one-offs would be more 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. 

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Under unchanged policies, risks to the budgetary projections for 2008 emanate from pending 
court  rulings,  in  particular  concerning  the  non-deductibility  of  IRAP  from  the  tax  base  of 
income taxes. Risks also arise from the economic 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 forecast, 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  projected  modest  increase  is  driven  by  a  falling  tax 
burden, particularly lower corporate income taxes, 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  programme15,  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 line 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  programme,  which  projected  an  improvement  in 
the structural position of ¼ pp. of GDP in 2008, the Council noted that the structural balance 
risked  deteriorating  substantially  in  2008,  unless  the  better-than-projected  2007  starting 
position was carried through and concluded that the MTO might not be achieved by 2011 as 
planned in the programme. Accordingly, the Council 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  measures  to  ensure  adequate  progress  towards  the 
MTO, so as to achieve it within the programme period, i.e. 2011. 

4. 

DEBT 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 that was observed at the time the EDP for Italy was initiated 
essentially  due  to  a  higher  estimate  of  the  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  debt  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  contribution  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 increased 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 the previous year given the much smaller-
than-anticipated amount of VAT reimbursements actually claimed by taxpayers. In addition, 

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OJ C 49, 22.2.2008, p. 49. 

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the  "stock-flow"  adjustment  in  2007  benefited  from  a  distribution  of  capital  amounting  to 
around 0.2% of GDP by a state-owned company (SACE SpA). 

The  debt  reduction  over  2006-2007,  based  on  an  increasing  primary  surplus  and  without 
significant debt-increasing operations below the line, appears in line with the correction of the 
excessive deficit. However, as the primary surplus is projected to fall in 2008 and measures to 
raise  it  again  in  the  medium-term  have  not  been  spelled  out,  the  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  government  debt  ratio  in  2008  and  2009,  albeit  at  a 
slower  pace  due  to  a  worsening  primary  surplus  and  dismal  economic  growth.  Risks 
associated with economic growth and budgetary developments also apply to the debt-to-GDP 
ratio. 

5. 

CONCLUSIONS 

The  general  government  deficit  increased  from  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 the deficit reduction are mainly permanent in 
nature.  Indeed,  the  deficit  in  2006  and  2007  would  have  been  even  lower  in  the  absence  of 
one-offs. The structural balance, i.e. the cyclically-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  about  0.1%  of  GDP,  without  which  the  deficit 
would nonetheless still be below 3% of GDP) and, on a no-policy change basis, to 2.4% in 
2009.  This  indicates  that  the  deficit  has  been  brought  below  the  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 increased by 2 percentage  points of  GDP in 2005 
and by further 0.6 of a percentage point in 2006. 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 operation in 2006 and its reversal in 2007. Without this operation the 
debt  ratio  would  have  remained  broadly  stable  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 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.  

From  an  overall  assessment,  it  follows  that  the  excessive  deficit  situation  in  Italy  has  been 
corrected. Accordingly, the Commission recommends that the Council abrogates its decision 
on the existence of an excessive deficit in Italy. 

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Table 2: Budgetary developments, 2003-2009 

% of GDP, unless indicated otherwise 

2003  2004  2005  2006 

General government balance 

-3.5 

-3.5 

-4.2 

-3.4 

2007 

2008 

2009 

outturn SP (2)  COM 
-2.3 
-2.4 
-1.9 

- Total revenues(5) 
- Total expenditure(5) 
Of which: - interest expenditure 

44.8 
48.3 
5.1 

44.2 
47.7 
4.7 

43.8 
48.0 
4.5 

45.4 
48.8 
4.6 

46.6 
48.5 
5.0 

46.2 
48.6 
4.8 

46.4 
48.7 
4.9 

- gross fixed capital formation 
Primary balance 

2.5 
1.6 

2.4 
1.2 

2.4 
0.3 

2.4 
1.3 

2.4 
3.1 

2.7 
2.5 

2.4 
2.6 

One-off and temporary measures 
Structural balance(1) 

1.7 
-5.1 

1.3 
-4.7 

0.6 
-4.5 

-0.4 
-2.8 

-0.2 
-1.5 

0.2 
-2.2 

0.1 
-1.9 

Structural primary balance(1) 
Government gross debt(4) 

0.0 

0.0 

2.6 
104.3  103.8 105.8  106.5  104.0 105.0

0.0 

1.8 

3.5 

Change in debt ratio (a) = (b) + (c) + (d) 
Contributions: - primary balance (b) 

- “snow ball” effect (c) 
- stock-flow adjustment (d) 

Pm 

Real GDP growth (%) 

-1.3 
-1.6 
1.9 
-1.6 
0.0 

-0.5 
-1.2 
0.5 
0.3 
1.5 

2.0 
-0.3 
1.9 
0.5 
0.6 

0.6 
-1.3 
0.9 
1.0 
1.8 

-2.5 
-3.1 
1.1 
-0.5 
1.5 

-1.8 
-2.5 
0.1 
0.6 
1.9 

3.1 
103.2 

-0.8 
-2.6 
1.5 
0.4 
0.5 

2.4 
2.5 

2.6 
3.4 

46.4 
48.7 
4.9 

45.9 
47.9 
4.9 

SP (2)  COM(3) SP(2) 
-2.2 
-1.5 
-2.4 
(-2.4) 
46.3 
48.5 
4.9 
(5.0) 
2.5 
2.6 
(2.6) 
0.1 
-2.0 
(-2.2) 
3.6 
3.3 
2.9 
103.5  102.6  101.5 
(103.0) 
-1.6 
-2.6 
0.9 
0.2 
1.5 
(0.6) 
-0.6 

-0.6 
-2.5 
2.0 
-0.1 
0.8 

-2.0 
-3.4 
1.5 
-0.1 
1.6 

0.0 
-1.6 

0.1 
-1.3 

-1.6 

-0.6 

Pm 
(1) 
(2) 

(3) 
(4) 

0.0 

-0.2 

Output gap 
Cyclically-adjusted (primary) balance excluding one-off and temporary measures. 
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. 
No-policy change assumption. 
The change in the gross debt ratio can be decomposed as follows: 

-1.0 

-0.3 

-0.6 

-0.6 

-0.3 

D
t
Y
t

−

D
t
Y
t

1
−

1
−

=

PD
t
Y
t

+

⎛
⎜⎜
⎝

D
t
Y
t

1
−

1
−

*

i
t
1

−
+

t

y
y

t

⎞
+⎟⎟
⎠

SF
t
Y
t

(5) 

where t is a time subscript; D, PD, Y and SF are the stock of government debt, the primary deficit, nominal GDP 
and  the  stock-flow  adjustment  respectively,  and  i  and  y represent  the  average  cost  of  debt  and  nominal  GDP 
growth. The term in parentheses represents the “snow ball” effect. 
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 forecast (COM)and November 2007 update of the stability programme (SP) (in 
brackets new official projections based on unchanged legislation of March 2008). 

EN 

9 

   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  the  European  Community,  and  in  particular 
Article 104(12) thereof, 

Having regard to the recommendation from the Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

By  Council  Decision  2005/694/EC16,  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  the  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. 

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 July 1997 on speeding up and clarifying the 
implementation  of  the  excessive  deficit  procedure17,  the  Council  made,  based  on  a 
recommendation  from  the  Commission,  a  recommendation  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. 

In accordance with Article 104(12) of the Treaty, a Council Decision on the existence 
of  an  excessive  deficit  is  to  be  abrogated  when  the  excessive  deficit  in  the  Member 
State concerned has, in the view of the Council, been corrected.  

In  accordance  with  the  Protocol  on  the  excessive  deficit  procedure  annexed  to  the 
Treaty, the Commission provides the data for the implementation of the procedure. As 
part  of  the  application  of  this  Protocol,  Member  States  are  to  notify  data  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 3605/93 of 22 November 1993 on the application of the Protocol 

16 
17 

OJ L 266, 11.10.2005, p. 57. 
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 

10 

   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 Italy before 1 April 
2008 and on the Commission services’ spring 2008 forecast, the following conclusions 
are warranted:  

– 

– 

– 

the general government deficit, 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 stability 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  economic  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  improved  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  proceeds  from  the  sale  of  real  estate. 
The envisaged worsening of the budgetary balance will be driven by both a rise 
in  the  ratio  of  current  primary  expenditure  to  GDP  and  lower  current  taxes. 
This  is  partly  offset  by  an  anticipated  decline  of  capital  expenditure,  which 
reflects the substantial one-off expenditure accrued in 2007. Although the 2.3% 
of  GDP  deficit  projection  is  only  slightly  above  the  official  deficit  target  of 
2.2% of GDP set in the November 2007 update 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  projected  to  worsen  by  more  than  ¼  of  a 
percentage point of GDP in 2008 and, on a no-policy change 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 

11 

   EN 

 
                                                 
– 

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  increased  by 
2 percentage points of GDP in 2005 and by further 0.6 of a percentage 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  operation,  i.e.  the  accumulation  of  liquid  assets,  in 
2006 and its reversal in 2007. Without this operation the debt ratio would have 
remained  broadly  stable  in  2006,  reflecting  the  improvement  in  the  primary 
the 
surplus 
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.  

the  Council  recommendation.  According 

line  with 

to 

in 

(6) 

In  the  view  of  the  Council,  the  excessive  deficit  in  Italy  has  been  corrected  and 
Decision 2005/694/EC should therefore be abrogated. 

HAS ADOPTED THIS DECISION:  

From  an  overall  assessment  it  follows  that  the  excessive  deficit  situation  in  Italy  has  been 
corrected. 

Article 1 

Decision 2005/694/EC is hereby abrogated. 

Article 2 

Article 3 

This Decision is addressed to the Republic of Italy.  

Done at Brussels, 

For the Council 
The President 

EN 

12 

   EN