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

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   EUROPEAN COMMISSION  Brussels, 3.7.2019  COM(2019) 351 final  COMMUNICATION FROM THE COMMISSION TO THE COUNCIL on the Spring 2019 round of fiscal surveillance for Italy {SWD(2019) 430 final}  
 
 
On 5 June 2019, the Commission assessed, in its report under Article 126(3) of the Treaty on 
the  Functioning  of  the  European  Union1,  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 for Italy.  

That conclusion was based on the following elements: 

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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. As such, Italy presented a gap to (broad) compliance with the required effort 
under  the  preventive  arm  of  the  Stability  and  Growth  Pact  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 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  terms2.  Those  measures,  improving  Italy’s 
compliance  status  with  the  preventive  arm  in  2019,  mainly  consist  of  higher-than-expected 
revenues3 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.  

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 
2 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. 
3 Additional revenues amount to around 6.2 bn EUR, of which higher tax revenues by 2.9 bn EUR, higher social 
security  contributions  by  0.6  bn  EUR  and  other  revenues,  including  higher  dividends  from  Bank  of  Italy  and 
Cassa  Depositi  e  Prestiti,  by  2.7  bn  EUR.  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. 

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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 now 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.  

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. 

Moreover,  the  Italian  government,  in  that  same  letter,  commits  to  have  fiscal  consolidation 
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.  The  government  mentions  that  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. 

Overall,  the  Commission  is  of  the  view  that  this  package  is  material  enough  not  to 
propose  to  the  Council  the  opening  of  an  EDP  for  Italy’s  lack  of  compliance  with  the 
debt  criterion  in  2018  at  this  stage.  The  Commission  will  keep  under  surveillance  the 
effective  implementation  of  this  package:  It  will  monitor  closely  the  execution  of  the 
2019  budget  and  will  assess  the  compliance  of  the  2020  draft  budgetary  plan  with  the 
Stability and Growth Pact. Moreover, progress with structural reforms included in the 
country-specific  recommendations  will  be  key  to  ensure  higher  growth  and  thereby 
contribute  to  a  decrease  in  the  debt-to-GDP  ratio.  The  Commission  will  assess  the 
implementation of these reforms within the context of the European Semester. 

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