April 10 (Bloomberg) -- Italy’s debt will reach a postwar record this year as the recession-hit country borrows to contribute to bailouts and pay arrears to suppliers.
The public debt will rise to 130.4 percent of gross domestic product in 2013 from 127 percent last year, Prime Minister Mario Monti’s office said in a statement after his Cabinet reviewed its budget plan. The budget deficit will drop to 2.9 percent of GDP this year, putting Italy within the European Union’s 3 percent limit.
“Many are suggesting we change strategy in the management of public finance,” Monti said at a press conference in Rome. “Discipline in public finances needs to be maintained in the years to come. Only if Italy stays out of the procedure for excessive deficit will it be able undertake actions needed for the country, like the recent payment of public administration debts.”
The government forecasts that the euro region’s third-biggest economy will contract 1.3 percent this year, before expanding by the same amount next year and by 1.5 percent in 2015, Finance Minister Vittorio Grilli told reporters in Rome today.
Even with the deficit falling and the country projecting a primary surplus of 2.4 percent for this year, Italy’s debt load, the second biggest in Europe after Greece, will still increase. The debt level was inflated by a plan passed this month to make 40 billion euros ($52 billion) in payments over the next two years owed to government suppliers.
The costs of contributing to bailouts of Greece, Portugal and Ireland also boosted the debt load. Excluding bailout costs, Italy’s total borrowing would be 126.9 percent of GDP in 2013, up from 124.3 percent last year.
Italy, with a caretaker government after February’s election failed to produce a clear winner, is plagued by “longstanding structural weaknesses” such as high government debt, the European Commission said today in a report. That “weighs on the country’s growth prospects through several channels, in particular the high tax burden needed to service the debt.”
The Treasury will spend 5.3 percent of GDP this year to finance the debt, or approximately 83 billion euros, the government said in today’s statement.
The yield on Italy’s 10-year bond fell 2 basis point to 4.33 percent and is now below the level prior to the February elections that left Monti’s caretaker government still in power.
The government expects to achieve 30 billion euros in savings between 2012 and 2015 from its review of spending and sees revenue of almost 1 percent of GDP a year from asset sales between 2013 and 2017.