Italy Needs 9 Billion Euros for Deficit Goal, Official Says

Italy may need at least 9 billion euros ($12 billion) in additional budget measures in 2013 to meet its deficit targets as the worsening recession hurts tax revenue and fuels unemployment costs, a Finance Ministry official said.

Italy will need to find 8 billion euros to finance jobless schemes and faces a 6 billion-euro revenue shortfall from value- added and gambling taxes, Finance Undersecretary Gianfranco Polillo said in an interview in Rome. That will be partly offset by a bigger-than-expected take from a new property tax and falling debt financing costs that will add 5 billion euros in resources.

The Bank of Italy today cut its forecast for the economy, predicting a contraction of 1 percent this year compared to a previous forecast of a 0.2 drop, saying the global slowdown and weak domestic demand were choking growth. That will make it harder for Italy to meet its goal of a 2013 deficit of 1.6 percent of gross domestic product, he said.

This year “there will be some spillover from a bigger deficit in 2012 stemming from the fact that GDP has slumped and we will have less coming in from VAT and a bit less from gaming, which we will only be able to partly compensate for with the increase in the property tax,” he said.

Structural Goal

Italy is on track to meet its goal to balance the budget in structural terms, or excluding the effects of the recession, this year, he said. The government probably missed its overall deficit target of 2.6 percent of GDP last year, Polillo said. The Bank of Italy said today the deficit in 2012 was about 3 percent, a prediction Polillo said was reasonable.

Italy has three possibilities to fill the 9 billion-euro gap, Polillo said. The next government can cut public spending, seek more revenue through fighting tax evasion or just let the deficit in 2013 run above 2 percent of GDP. Italy holds general elections on Feb. 24-25.

Introducing new austerity measures, such as an increase of the value-added tax rate, would further depress the economy, Polillo said. That “would have the double effect of increasing the tax burden and further hurt consumer spending,” he said.

Extraordinary measures, such as the sale of public assets, are needed to cut Italy’s 2 trillion-euro debt, Polillo said. “There’s no alternative,” he said.

To contact the reporter on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net

To contact the editor responsible for this story: Jerrold Colten at jcolten@bloomberg.net

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