This week the government presented its 2020 budget plan which targets a deficit of -2.2% of GDP – up from -2.1% in 2019. Thanks to finding savings to the tune of EUR23bn, the government was able to avert an automatic sales tax hike from next year onwards. While a renewed escalation in relations with its EU partners à la 2018 – when the EU Commission flat-out rejected Italy’s 2019 draft budget – is unlikely, given also the Italian government’s intentions to exchange over the budget targets in a constructive manner, full EU approval is not a given. Critic from Brussels is likely to focus on the expected rise in the structural deficit to -1.4% next year up from -1.2% in 2019, whereas in July the EU Commission had argued for a reduction by -0.6pp in 2020. In addition the budget targets rest on rather ambitious assumptions concerning proceeds from the fight against tax evasion (EUR7bn) and GDP growth accelerating to +0.6% in 2020 (we forecast +0.4%). Markets meanwhile have already thrown lingering debt sustainability concerns over board, buying 10-yr Italian government debt at a record-low yield of 0.88%.
