Italy to Meet EU Deficit-to-GDP Limit in 2013, Official Says

Italy will keep its deficit within the European Union limit of 3 percent of gross domestic product this year, Finance Undersecretary Pier Paolo Baretta said.

“We’ll do whatever is needed to remain within the 3 percent limit,” Baretta said in a phone interview yesterday. The government may need to find an additional 1.5 billion euros ($2 billion) of savings to reach the EU requirement because of the sluggish economy and payments of overdue debts to companies, he said.

Prime Minister Enrico Letta is under pressure to maintain the budget discipline required by the EU at the same time as former premier Silvio Berlusconi’s party is pushing for tax relief for businesses and consumers.

Letta’s cabinet will meet today in Rome to revise its budget plan and approve updated economic forecasts. The government in April predicted a 2.9 percent deficit-to-GDP ratio for this year. Letta’s administration expects debt to be 132.2 percent of GDP next year, according to a draft of the budget document set to be published tomorrow. A government spokesman declined to confirm the figures.

Italy’s 10-year bond yield was little changed at 4.30 percent at 10:02 a.m. in Rome, leaving the difference with comparable German bunds at 238.6 basis points.

Property Tax

Italy may need an additional 5 billion euros if it decides to cover a revenue shortfall from the cancellation of the second installment of a property tax, the elimination of a value-added tax hike planned for Oct. 1, as well as finance more jobless benefits and foreign missions, Baretta said. This would be on top of the 1.5 billion euros needed to cover a potential deficit-limit breach, Baretta said.

The government should probably consider reviewing its decision to cancel the installment of the property tax on primary residences, knows as IMU, in order to avoid increasing VAT next month, Baretta said. “If we consider the IMU chapter closed, then the risk of an increase in VAT is there.”

Italy will forecast a 1.7 percent economic contraction this year and a 1 percent expansion next year, Ansa news agency reported yesterday, without citing anyone.

In April, the Rome-based Treasury estimated the euro region’s third-biggest economy will contract 1.3 percent this year and grow 1.3 percent in 2014, while both the International Monetary Fund and the Organization for Economic Cooperation and Development expect GDP to contract 1.8 percent this year.

‘Comforting Signal’

Finance Minister Fabrizio Saccomanni said earlier this month that he expects the Italian economy to emerge from recession in the second half and expand in 2014. “I think the fourth quarter will give us a comforting signal,” Baretta said.

“Investors would probably tolerate a small deviation from the deficit target provided the government had a convincing strategy of economic reforms and privatization in a context of political stability,” said Riccardo Barbieri, chief European economist at Mizuho International Plc in London. “Unfortunately this is not the case at the moment.”

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