IMF warns Italy should cut deficit, debt while growth still above potential

[BRUSSELS] Italy must cut its fiscal deficit and public debt as a priority as long as its economic growth, albeit slowing, is still above potential, the International Monetary Fund warned on Thursday.

Rome is locked in a bitter dispute with the European Commission over its 2019 draft budget, which envisages a sharp rise in the budget deficit to cover election promises of higher spending, tax cuts and a lower pension age.

And at above 130 per cent of gross domestic product, Italy's public debt is the second highest in Europe after Greece and Rome has the highest debt servicing costs in the European Union.

"Countries should prioritise measures that reduce fiscal deficits toward their medium-term targets and lower debt," the IMF said in a regional outlook for Europe.

"The urgency is greater in countries with significant vulnerabilities, such as Italy and Turkey," it said.

Italy's populist government argues that the bigger headline deficit of 2.4 per cent of GDP, up from 1.8 per cent this year, will help boost economic growth accelerating it to 1.5 per cent next year from 1.2 per cent in 2018 and to 1.6 per cent in 2020.

The European Commission believes these growth forecasts are highly optimistic and the planned deficit, already too high, will be even higher if growth falls short of the projection.

The IMF took a similar view forecasting Italy's GDP growth at only 1.0 per cent in 2019 and 0.9 per cent in 2020.

Yet, even at that rate, growth would be at twice its potential rate - the highest level of real GDP growth that does not increase inflation - which the Commission said for Italy was 0.4 per cent in 2018 and 0.5 per cent in 2019.

"Policymakers should seize the opportunity of above-potential growth and low unemployment to advance growth-friendly policies to reduce high levels of public debt and rebuild fiscal buffers to facilitate coping with future shocks," the IMF said.

Italy has until Nov 13 to send a new draft budget to Brussels, revising the size of its structural deficit, which excludes one offs and cyclical swings, so that it would fall by 0.6 per cent of GDP as required by EU rules, rather than rise by 0.8 per cent as planned now.

Such a structural deficit reduction would also help bring debt on a downward path, the Commission says.

But Italy's government has made clear there would be no change to the planned deficit size, putting Rome firmly on a collision path with the other 18 countries sharing the euro, which are worried Italy's profligate policies could trigger a debt crisis that would hit them all.

REUTERS