COMMISSION STAFF WORKING DOCUMENT Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE COUNCIL on the Spring 2019 round of fiscal surveillance for Italy
Date: 2019-07-03
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Italy, budget deficit, budget policy, budgetary control, budgetary expenditure, fiscal policy, gross domestic product, public debt, stability pact, structural adjustment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 3.7.2019  SWD(2019) 430 final  COMMISSION STAFF WORKING DOCUMENT Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE COUNCIL on the Spring 2019 round of fiscal surveillance for Italy {COM(2019) 351 final}  
 
 
1. 

Introduction 

The objective of this document is to summarise the outcome of the spring 2019 round of fiscal 
surveillance of Italy under the Stability and Growth Pact (‘SGP’). 

On 5 June 2019, the Commission assessed, in its report under Article 126(3) of the Treaty on 
the Functioning of the European Union (‘TFEU’)1, that Italy did not satisfy the debt criterion 
of  the  Treaty  in  2018,  and  concluded  that  a  debt-based  excessive  deficit  procedure  (‘EDP’) 
was warranted.  

That conclusion was based on the following elements: 

• 

• 

• 

final  data  for  2018  showed  that  Italy’s  public  debt-to-GDP  ratio  increased  from 
131.4 % in 2017 to 132.2 % in 2018;  

Italy’s structural balance deteriorated by 0.1% of GDP in 2018 and was expected 
to  further  deteriorate  by  0.2%  of  GDP  in  2019  based  on  the  Commission  2019 
spring  forecast,  hence  falling  short  of  the  fiscal  efforts  recommended  to  Italy  by 
the  Council  by  a  large  margin.  Namely,  Italy  presented  a  gap  to  (broad) 
compliance with the required effort under the preventive arm of the SGP of 0.4% 
of GDP in 2018 and 0.3% of GDP in 2019; 

the Commission 2019 spring forecast pointed to a headline deficit above the 3% of 
GDP reference value in 2020, should the VAT hike legislated by the government 
as a safeguard clause not  be activated or should  it not  be replaced by  alternative 
financing measures. 

The  conclusion  of  the  Commission  report  was  supported  by  the  Economic  and  Financial 
Committee  in  its  opinion  adopted  on  11  June  2019  under  Article  126(4)  of  the  Treaty.  The 
Economic  and  Financial  Committee  also  invited  Italy  to  “take  the  necessary  measures  to 
ensure compliance with the provisions of  the Stability and Growth Pact  in accordance with 
the EDP process”, and added that “further elements that Italy may put forward could be taken 
into account by the Commission and the committee”. 

On  1  July  2019,  the  Italian  government  adopted,  via  its  mid-year  budget  for  2019,  a  fiscal 
correction  for  2019.  This  document  explains  how  that  package  was  assessed  by  the 
Commission and to what extent it affects Italy’s compliance status with the SGP based on the 
Commission 2019 spring forecast. 

The  document  is  structured  as  follows.  Section  2  recalls  the  latest  macroeconomic  and 
budgetary developments in Italy. Section 3 outlines the main steps of the 2019 spring round of 
fiscal surveillance for Italy. Section 4 describes and assesses the new measures put forward by 
the Italian authorities after the issuance of the 126(4) opinion of the Economic and Financial 
Committee. Section 5 concludes. 

1  Report from the Commission COM(2019) 532 final “Italy, Report prepared in accordance with Article 126(3) 
of the Treaty on the Functioning of the European Union”, Brussels, 5.6.2019. 

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2.  Recent macroeconomic and budgetary developments in Italy 

Italy’s  economy  slipped  into  a  mild  contraction  in  the  second  half  of  2018.  Overall,  Italy’s 
real  GDP growth reached 0.9% in 2018. The Commission 2019 spring forecast expects real 
GDP growth to decelerate to 0.1% in 2019, before moderately recovering and reaching 0.7% 
in 2020.  

For 2019, those projections expect aggregate domestic demand to lend only limited support to 
growth, as a drop in investment demand largely offsets the moderately positive impact from 
consumer spending; no growth contribution is expected from net trade. In particular, capital 
spending  is  set  to  be  hindered  by  policy  uncertainty  both  domestically  and  internationally, 
while the re-introduction of investment-related tax incentives is likely to soften the decline in 
business  investment.  Moreover,  higher  sovereign  spreads  compared  to  early  2018  are 
translating, although with a lag, into tighter credit conditions. Private consumption growth is 
set  to  slightly benefit  from  the positive impact  of lower inflation on real  disposable income 
and  the  new  citizenship  income  scheme,  while  deteriorating  labour  market  and  consumer 
confidence  are  likely  to  dampen  consumer  spending  and  divert  part  of  the  expected  rise  in 
income to savings.  

For 2020, based on a no-policy-change assumption, growth is expected to moderately rebound 
on  the  back  of  firming  external  demand,  as  Italian  exporters  limit  their  losses  in  market 
shares, and higher social transfers. The Commission  2019 spring  forecast expects  consumer 
price inflation to remain low at 0.9% in 2019, partly due to lower energy prices, and to reach 
1.1% in 2020. Nominal GDP growth is projected at 0.8% in 2019 and 1.8% in 2020.  

The  growth  outlook  in  the  Commission  2019  spring  forecast  is  subject  to  predominantly 
negative risks, as trade tensions continue to cloud the global outlook and higher-than-expected 
oil prices could curb consumers’ purchasing power. In addition, financial markets remain very 
sensitive to policy changes and any possible related increases in sovereign yields could affect 
sentiment  and  private  sector  funding  conditions.  Finally,  the  rollback  of  past  structural 
reforms  could  negatively  impact  growth  potential,  for  instance  to  the  extent  that  higher 
flexibility for early retirement may negatively affect labour supply in a context where Italy is 
already lagging  behind  the EU average for the participation of its older  workers  (55-64  age 
group) in employment. 

On  the  fiscal  side,  the  Commission  2019  spring  forecast  expects  Italy's  general  government 
deficit to increase from 2.1% of GDP in 2018 to 2.5% of GDP in 2019, largely because of the 
macroeconomic slowdown and the impact of the budgetary measures included in Italy's 2019 
budget, with a net deficit-increasing impact of around 0.5% of GDP.2 More in detail, public 
expenditure  is  set  to  increase  in  2019  because  of  higher  flexibility  for  early  retirement,  the 
rollout  of  a  citizenship  income  scheme  and,  to  a  lesser  extent,  more  funds  for  public 
investment. Partial financing is provided by a spending review and changes to the tax regime, 
especially  for  firms,  temporarily  supporting  revenues.  As  regards  2020,  the  Commission 
forecast  is  based  on  a  no-policy-change  assumption  and  does  not  incorporate  the  impact 
(1.3%  of  GDP)  of  the  increase  in  VAT  rates  legislated  for  2020  as  a  “safeguard  clause”  to 
ensure the attainment of the budgetary targets, given the systematic repeals recorded in recent 
years and the lack of details on possible alternative measures. The Commission 2019 spring 
forecast  expects  Italy's  structural  balance  to  have  deteriorated  by  0.1%  of  GDP  in  2018, 

2  That  amount  includes  the  repeal  of  the  VAT  hike  (worth  0.7%  of  GDP)  legislated  for  2019  as  a  safeguard 
clause and the activation of the spending-freezing mechanism (worth 2 billion EUR or 0.11% of GDP in 2019) 
assumed by Italy’s 2019 Stability Programme. 

2 

 
 
                                                 
followed  by  larger  structural  deteriorations  of  0.2%  of  GDP  in  2019  and  1.2%  of  GDP  in 
2020.  The  attainment  of  Italy's  current  medium-term  budgetary  objective  ('MTO')  of  a 
budgetary  surplus  of  0.5%  of  GDP  in  structural  terms  is  not  expected  over  the  forecast 
horizon based on both the government plans and the Commission 2019 spring forecast. 

Regarding  general  government  debt  developments,  the  Commission  2019  spring  forecast 
expects that Italy's debt-to-GDP ratio, after reaching 132.2% in 2018, will continue rising to 
133.7% in 2019 and 135.2% in 2020, mainly due to a large debt-increasing snowball effect, a 
declining  primary  surplus,  and  the  assumption  based  on  past  experience  of  an  only  partial 
achievement of the ambitious privatisation proceeds planned by the government in 2019 (1% 
of  GDP)  and  2020  (0.3%  of  GDP).  The  increase  in  the  spot  yields  at  issuance  in  2018  and 
through early 2019 reflects higher risk premia on Italy’s public debt,  with sovereign spreads 
undergoing an upward level shift of around 100 basis points since May 2018. Table 1 below 
summarises the main macroeconomic and fiscal variables described so far.  

Table 1: Comparison of macroeconomic developments and forecasts 

3 

20172018OutturnOutturnCOMSPCOMSPReal GDP (% change)1.70.90.10.20.70.8Contributions to real GDP growth:- Final domestic demand1.71.00.30.50.70.9- Change in inventories-0.40.0-0.1-0.20.00.0- Net exports0.3-0.10.00.00.0-0.1Output gap1-0.5-0.1-0.3-0.3-0.1-0.2Employment (% change)1.20.90.3-0.30.30.2Unemployment rate (%)11.210.610.911.011.011.1Labour productivity (% change)0.80.10.20.60.20.6HICP inflation (%)1.31.20.91.01.12.3GDP deflator (% change)0.50.80.71.01.02.0Comp. of employees (per head, % change)0.32.00.91.21.01.5General government balance (% of GDP-2.4-2.1-2.5-2.4-3.5-2.1General government debt (% of GDP)131.4132.2133.7132.6135.2131.3Italy's Stability Programme for 2019 (SP); Commission 2019 spring forecast (COM); Commission calculationsSource:1 In percent of potential GDP, with potential GDP growth recalculated by Commission services using the commonly agreed methodology.Note:20192020 
 
 
 
 
 
 
 
3.  Main steps of the spring 2019 round of fiscal surveillance  

According  to  the  data  notified  by  the  Italian  authorities  in  April  2019  and  subsequently 
validated  by  Eurostat,3  Italy’s  general  government  gross  debt  increased  in  2018,  reaching 
132.2% of GDP (from 131.4% in 2017). As such, in 2018 Italy’s debt exceeded the 60% of 
GDP reference value of  the Treaty and, based on outturn data, it did  not comply by a large 
margin (gap of 7.6% of GDP) with the debt reduction benchmark, which requires each year a 
sufficient reduction in the differential between a Member State’s debt-to-GDP ratio and the 60 
% of GDP reference value. 

Moreover, for 2019, the Commission 2019 spring forecast  expects  Italy’s debt-to-GDP ratio 
to continue rising, to 133.7% in 2019 and 135.2% in 2020 (see Section 2). As such, based on 
the Commission forecast, Italy is not expected to comply with the debt reduction benchmark 
either  in  2019  (gap  of  9.0%  of  GDP)  or  in  2020  (gap  of  9.2%  of  GDP,  respectively).  This 
provides  evidence  of  a  prima  facie  non-compliance  with  the  debt  criterion  of  the  TFEU.  In 
line  with  the  provisions  of  the  TFEU,  the  Commission  analysed  all  relevant  factors  in  its 
report under Article 126(3) TFEU of 5 June 2019.  

In  its  analysis,  the  Commission  took  the  following  relevant  factors  into  account:  (i)  Italy’s 
non-compliance with the recommended adjustment path towards the medium-term budgetary 
objective in 2018 based on ex post data, together with a risk of significant deviation from the 
preventive arm requirement in 2019 and a headline deficit above 3% of GDP in 2020 based 
on  the  Commission  forecast;  (ii)  the  macroeconomic  slowdown  recorded  in  Italy  from  the 
second  half  of  2018,  which  only  partly  explains  its  large  gaps  to  compliance  with  the  debt 
reduction  benchmark;  and  (iii)  the  limited  progress  made  by  Italy  in  addressing  the  2018 
Country  Specific  Recommendations,  including  the  backtracking  on  past  growth-enhancing 
reforms, as well as the lack of details on both content and timeline of the reform commitments 
in its 2019 National Reform Programme.  

Overall, the analysis in the Commission report led to the conclusion that the debt criterion in 
the TFEU is not fulfilled and that a debt-based EDP was thus warranted for Italy. 

The  conclusion  of  the  Commission  report  was  endorsed  by  the  Economic  and  Financial 
Committee  of  the  Council,  in  its  opinion  under  Article  126(4)  of  the  Treaty  adopted  on  11 
June  2019.  Supporting  the  Commission,  the  Member  States  also  invited  Italy  to  “take  the 
necessary  measures  to  ensure  compliance  with  the  provisions  of  the  Stability  and  Growth 
Pact in accordance with the EDP process”, and added that “further elements that Italy may 
put forward could be taken into account by the Commission and the committee”. 

3 Pursuant to Regulation (EC) No 479/2009, Member States have to report to the Commission, twice a year, their 
planned  and  actual  government  deficit  and  debt  levels.  The  most  recent  notification  of  Italy  can  be  found  at 
http://ec.europa.eu/eurostat/web/government-finance-statistics/excessive-deficit-procedure/edp-notification-
tables. 

4 

 
 
                                                 
4.  New measures put forward by the Italian authorities on 1 July 2019 

On  1  July  2019,  the  Italian  government  adopted,  via  its  2019  mid-year  budget,  a  fiscal 
correction  for  2019  amounting  overall  to  around  7.6  bn  EUR  or  0.42%  of  GDP  in  nominal 
terms and 8.2 bn EUR or 0.45% of GDP in structural terms4. Moreover, the spending-freezing 
mechanism  already  legislated  via  the  2019  budget  law  (worth  2  billion  EUR  or  0.11%  of 
GDP)  has  been  fully  activated  for  2019.  The  new  measures  put  forward  by  the  Italian 
government,  improving  Italy’s  compliance  status  with  the  preventive  arm  in  2019,  mainly 
consist  of  higher-than-expected  revenues  and  lower-than-projected  public  expenditure 
resulting from the budget execution in 2019, with the latter being further guaranteed via a new 
spending-freezing clause.  

More in detail, the government’s mid-year budget for 2019, which must now be adopted by 
the Italian parliament, indicates an overall improvement of the general government deficit of 
7.6  bn  EUR  due  to  the  existence  of:  (i)  additional  revenues  worth  overall  6.2 bn  EUR,  of 
which  higher  tax  revenues  by  2.9 bn  EUR5,  higher  social  security  contributions  by  0.6  bn 
EUR and other revenues, including higher dividends from Bank of Italy and Cassa Depositi e 
Prestiti,6  by  2.7 bn  EUR;  and  (ii)  additional  public  spending  worth  overall  0.1 bn  EUR, 
mainly  due  to  the  financing  of  new  provisions  included  in  the  “growth  decree”,  only  partly 
offset  by  lower-than-projected  expenditure  for  deferred-tax-assets  and  for  the  servicing  of 
Italy’s public debt, given the recent downward shift in the level of sovereign yields. 

Moreover,  the  government  adopted  a  decree-law7,  to  be  converted  into  law  by  the  Italian 
parliament within sixty days, providing for a new spending-freezing mechanism worth 1.5 bn 
EUR (or 0.08% of GDP) to be activated by 15 September 2019, should the projected savings 
on  the  early  retirement  and  citizenship  income  schemes  fail  to  materialise  as  projected, 
thereby putting at risk the attainment of the new fiscal target for 2019.  

Overall,  the  budget  adjustment  and  the  new  spending-freezing  clause  ensure  that  the  higher 
revenues and lower spending that have emerged so far are used for deficit and debt reduction 
and  are  not  spent  for  other  measures  in  the  rest  of  2019.  A  revision  of  the  legislation 
implementing  the  citizenship  income  and  the  early  retirement  schemes,  repealing  the 
possibility  to  transfer  unused  resources  earmarked  for  those  two  measures  between  the  two 
schemes and across budgetary years, provides further reassurances in this respect. 

After  taking  into  account  the  new  package  of  measures,  Italy’s  headline  deficit  would  now 
reach  2.04%  of  GDP  in  2019  (compared  to  2.5%  in  the  Commission  2019  spring  forecast), 
meeting  the  deficit  target  adopted  by  the  parliament  in  December  2018  through  the  2019 
budget, despite the significant worsening of the macroeconomic outlook recorded since then. 

4 The  difference is due to lower-than-expected one-off revenues  from tax amnesty (“rottamazione”) of around 
0.6 bn EUR, which worsen the fiscal target in nominal terms but not in structural terms. The allowance of 0.18% 
of GDP preliminarily granted to Italy for “unusual events” related to the collapse of the Morandi Bridge and to 
hydrogeological risk is not yet taken into account in these computations, as it will have to be confirmed based on 
outturn data for 2019. 
5 In particular, the higher tax revenues of 2.9 bn EUR are due to: (i) better-than-expected developments of the 
personal  income  tax  (IRPEF)  by  around  0.4  bn  EUR;  (ii)  higher  revenues  from  value-added  tax  by  around 
0.35 bn EUR; (iii) higher receipts from lotteries and gambling by around 0.2 bn EUR; (iv) the settlement of past 
tax liabilities from a large Italian company (Kering Group - Gucci) by around 1 bn EUR; (v) other revenues (e.g. 
for CO2 auctions) of around 0.95 bn EUR. 
6 Cassa Depositi e Prestiti is Italy’s national promotional institution. The Ministry of Economy and Finance is its 
majority shareholder.   
7 Decreto legge 1 luglio 2019, “Misure urgenti in materia di miglioramento dei saldi di finanza pubblica”. 

5 

 
 
                                                 
This would correspond to a structural improvement of around 0.2% of GDP (compared to a 
deterioration of 0.2% in the Commission 2019 spring forecast). 

As regards 2020, the Italian government has committed, in a letter sent to the Commission on 
2 July 2019, to achieve a structural improvement in line with the requirements of the SGP, by 
ensuring the full replacement of the VAT hike legislated as  a safeguard clause for that  year 
with  offsetting  fiscal  measures,  including  a  spending  review  and  a  revision  of  tax 
expenditures.  

Specifically, the  authorities reiterate the commitment, already made on  31 May 2019 in  the 
documents  concerning  relevant  factors  transmitted  to  the  Commission  in  accordance  with 
Article  2(3)  of  Regulation  (EC)  No  1467/97,  to  abide  by  the  parliamentary  resolution 
accompanying the 2019 Document of Economic and Finance. The latter called for the respect 
of the fiscal targets for 2020 put forward in the 2019 Stability Programme, in compliance with 
the preventive arm of the SGP, by finding alternative financing measures in case of repeal of 
the  already  legislated  rise  in  the  reduced  and  standard  VAT  rates  as  of  1  January  2020.  To 
recall, the new fiscal country-specific recommendation to Italy, proposed by the Commission 
in  the context of the European Semester on 5 June 2019 and expected to be adopted by the 
Council on 9 July 2019, asks Italy to “ensure a nominal reduction of net primary government 
expenditure  of  0.1%  in  2020,  corresponding  to  an  annual  structural  adjustment  of  0.6%  of 
GDP” and to “use windfall gains to accelerate the reduction of the general government debt 
ratio”8. 

In the letter, the government indicates that the abrogation of the VAT hike, while ensuring a 
structural improvement in line with the requirements of the SGP, will be carried out through 
an integrated strategy relying on the following elements: (i) a spending review; (ii) a revision 
of tax expenditures; and (iii) the carry-over to 2020 of the higher revenues and lower public 
expenditure, especially on citizenship income and early retirement schemes, recorded in 2019. 

Finally,  the  letter  indicates  that  the  government's  fiscal  consolidation  will  proceed  hand  in 
hand with structural reforms aimed at improving the growth potential of the Italian economy, 
in line with the country-specific recommendations proposed the Commission in the context of 
the European Semester on 5 June 2019 and expected to be adopted by the Council on 9 July 
2019. Those reforms should notably aim at improving the efficiency of the public sector and 
the legal system, as well as enhancing human capital and productivity. 

8  Recommendation  for  a  Council  Recommendation  on  the  2019  National  Reform  Programme  of  Italy  and 
delivering a Council opinion on the 2019 Stability Programme of Italy, Brussels, 5.6.2019 COM(2019) 512 final. 

6 

 
 
                                                 
  
 
 
5.      Conclusion 

On  1  July,  the  Italian  government  adopted,  via  its  mid-year  budget  for  2019,  a  fiscal 
correction for 2019 amounting overall to 7.6 bn EUR or 0.42% of GDP in nominal terms and 
8.2 bn EUR or 0.45% of GDP in structural terms for 2019. Those measures, improving Italy’s 
compliance  status  with  the  preventive  arm  in  2019,  mainly  consist  of  higher-than-expected 
revenues and lower-than-projected public expenditure resulting from the budget execution in 
2019, with the latter being further guaranteed via a newly legislated spending-freezing clause 
(worth  1.5  bn  EUR  or  0.08%  of  GDP)  to  be  activated  by  15  September  2019  in  case  of 
underachievement of the new fiscal target.  

Overall,  the  budget  adjustment  and  the  new  spending-freezing  clause  ensure  that  the  higher 
revenues and lower spending that have emerged so far are used for deficit and debt reduction 
and  are  not  spent  for  other  measures  in  the  rest  of  2019.  A  revision  of  the  legislation 
implementing  the  citizenship  income  and  the  early  retirement  schemes,  repealing  the 
possibility  to  transfer  unused  resources  earmarked  for  those  two  measures  between  the  two 
schemes and across budgetary years, provides further reassurances in this respect.  

With  these  measures,  Italy’s  headline  deficit  is  expected  to  reach  2.04%  of  GDP  in  2019 
(compared  to  2.5%  in  the  Commission  2019  spring  forecast),  meeting  the  deficit  target 
adopted by the parliament in December 2018 through the 2019 budget, despite the significant 
worsening  of  the  macroeconomic  outlook  recorded  since  then  (with  real  GDP  growth  now 
expected  by  the  Commission  at  around  0.1%  of  GDP  for  2019,  down  from  around  1% 
projected last autumn). 

This would correspond to a structural improvement of around 0.2% of GDP (compared to a 
deterioration of 0.2% in the Commission 2019 spring forecast). As such, Italy is now expected 
to be broadly compliant with the required effort under the preventive arm of the Stability and 
Growth  Pact  in  2019,  bridging  the  0.3%  of  GDP  gap  estimated  on  the  basis  of  the 
Commission  2019  spring  forecast.  Moreover,  the  additional  fiscal  effort  delivered  by  the 
government  for  2019  is  such  that  it  also  partially  compensates  the  deterioration  in  the 
structural balance recorded in 2018. 

As regards 2020, the Italian government has committed, in a letter sent to the Commission on 
2 July 2019, to achieve a structural improvement in line with the requirements of the SGP, by 
ensuring the full replacement of the VAT hike legislated as a safeguard clause for that  year 
with  offsetting  fiscal  measures,  including  a  spending  review  and  a  revision  of  tax 
expenditures. 

7