Italy's Fiscal Momentum: Italy's 2023 budget deficit exceeded expectations, yet its enormous public debt still decreased, propelled by robust inflation and stronger-than-anticipated economic growth, official figures revealed on Friday.

Italy's gross domestic product (GDP), the third-largest in the eurozone, rose by 0.9 per cent, according to Italy's national statistics bureau ISTAT. This figure slightly surpassed the latest projection of 0.8 per cent by Giorgia Meloni's administration but marked a deceleration from the 4.0 per cent growth in 2022, which was upwardly revised from the initially reported 3.7 per cent.

Despite the fiscal shortfall, Italy's public debt, which is the second-largest in the eurozone proportionally, decreased compared to the previous year as a percentage of the GDP, aided by robust inflation that elevated the nominal GDP level.

GDP ratio drops

According to ISTAT, the public debt dropped to 137.3 per cent of the GDP in 2023 from 140.5 per cent in the prior year. This figure was nearly three points lower than the government's target of 140.2 per cent, with the 2022 debt level revised down from the previously reported 141.6 per cent.

Meloni's government aims to reduce the deficit to 4.3 per cent of GDP this year. However, this goal faces challenges due to an imminent decision by the EU statistics bureau Eurostat regarding the classification of fiscal incentives for energy-saving home improvements, known as the Superbonus.

These incentives, initiated before the current government assumed office in 2022, revitalised the struggling construction sector and contributed to a growth resurgence post-COVID-19. However, they incurred substantial costs for the public accounts.

Overshooting expectations

Economy Minister Giancarlo Giorgetti attributed last year's substantial deficit overshoot to the "irresponsible season of the Superbonus," stating that it surpassed already pessimistic expectations.

ISTAT's data revealed that last year's growth was driven by domestic demand, with investments, consumer spending, and government expenditures all experiencing solid increases compared to the previous year. Modest contributions from trade flows were noted, while a reduction in inventory levels negatively impacted growth by 1.3 percentage points.

Growth rate targets

The Treasury targets a 1.2 per cent growth rate this year, a figure deemed overly optimistic by independent bodies in light of recent subdued data, which suggest a GDP increase of approximately 0.7 per cent.

In the fourth quarter of last year, the economy expanded by 0.2 per cent compared to the previous three months, following a 0.1 per cent increase between July and September. Additional data released on Friday indicated a net loss of 34,000 jobs in January, alongside the manufacturing sector's contraction for the 11th consecutive month in February.

Meanwhile, inflation has notably slowed down, stabilising at 0.9 per cent in February.

(With Reuters Inputs)