Fri. Dec 3rd, 2021

Brussels has warned Italy to curb government spending growth and pursue a “prudent” fiscal policy next year, as the European Commission flags budgetary risks in high-debt economies.

In its annual review of EU member states’ budget plans, Brussels found that Rome did not adequately limit the growth of its “nationally funded current expenditure” in its 2022 budget and encouraged it to take the “necessary measures” to make up the surplus. to address, given its debt-to-GDP ratio of more than 150 percent.

“Given the level of Italy’s government debt and high sustainability challenges in the medium term before the outbreak of the Covid-19 pandemic. . . it is important to maintain prudent fiscal policy to ensure sustainable public finances, ”the commission said.

The ruling is a setback for Italian Prime Minister Mario Draghi, who took office this year with a promise to help restore strained relations between Brussels and Rome over budget targets. The former head of the European Central Bank has set out an ambitious plan to revamp Italy’s economy in exchange for billions in loans and grants from the EU’s Recovery and Resilience Fund (RRF).

The warnings will receive more attention this year as the commission is revision the suitability of its debt and deficit rule book known as the Stability and Growth Pact (SGP) – a debate that runs the risk of reviving old divisions between thrifty northern eurozone economies and countries with higher debt in the south. Draghi called for a “change” in the rules to take into account higher debt levels that governments took up during the pandemic. No concrete EU proposals on the SGP are available until next year.

A commission official said on Wednesday that Italy had been “invited” to take Brussels’ advice on spending, but would not have to submit a revised budget. Nationally funded current expenditure in Italy will have a 1.5 percent impact of GDP on the country’s underlying fiscal position, the commission said. One EU official described the surplus as “significant”.

Italy’s assessment comes with a wider warning that a number of high-debt countries will increase current spending by more than their potential growth rates, “suggesting an increasing weight of permanent current spending or unfunded tax cuts”.

Brussels wants fiscal policy to remain moderately supportive in the eurozone next year, but that fiscal policy measures gradually “turn” towards investments that drive a sustainable recovery. Member countries must make use of the billions of recovery funds provided by the EU’s 800 billion euro landmark lending instrument.

About a quarter of all recovery assistance measures in 2022 will be funded by RRF money. Spain will spend the most cash on recovery funds over 2021-2022 – at about 3 percent of national GDP. “RRF spending will be very significant in a number of member states,” an EU official said.

Brussels’ overall draft budget evaluations will have to be signed by EU finance ministers next month, a negotiation that diplomats say will be a foretaste of broader divisions over the future of the SGP. The EU’s fiscal rulebook has been suspended since 2020 due to the pandemic and will be reinstated in 2023.

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