Italy will likely revise up its budget deficit for recent years, potentially bringing it near to 10 per cent of last year’s gross domestic product, as it incorporates the cost of a tax break the country’s finance minister recently branded “reckless.”

Next week, the statistics agency Istat is set to incorporate the impact of generous tax credits originally meant to stimulate green building renovations into national accounts. This review – due March 1 – will probably affect the 2021 and 2022 deficits, according to a person familiar with the matter, who asked not to be identified as deliberations are confidential. The fallout for 2023 is unclear. 

The adjustment could undermine the country’s progress in restoring confidence in its public finances after the shock of the pandemic. While the recalculation won’t have a direct impact on debt, it might prompt investors to review their assessment of Italy. 

The revisions “may become a wake-up moment for financial markets,” said Lorenzo Codogno, a former chief economist at the Italian finance ministry. “The government will have to find a solution, which will be difficult to reconcile with the need to address the fiscal and accounting issue.”

The finance ministry is still awaiting data from Istat to evaluate the exact impact, the Rome-based institution said when contacted by Bloomberg.

Last week, Prime Minister Giorgia Meloni’s government suddenly halted the tax credit system, with Finance Minister Giancarlo Giorgetti calling it a “reckless policy” that threatened the solidity of Italy’s finances. The most generous of these programmes was known as the “superbonus.” It offered a tax break worth 110 per cent of the amount spent and cost more than US$117 billion since its inception.

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A key complicating factor is the decision by Italy’s populist government under then-Prime Minister Giuseppe Conte to make the credits fully and indefinitely tradable between banks, companies and financial institutions. Meloni’s predecessor, Mario Draghi, had already intervened to limit what he called a “system without checks.” 

Istat and European Union statistics agency Eurostat are consulting on whether “these tax credits are to be considered as payable or non-payable,” European Commission spokeswoman Arianna Podesta said. This will dictate whether the recalculation will be frontloaded or spread out across several years. The decision will be taken in coming weeks, Podesta said.

The cumulative impact on Italy’s deficit will be “exactly the same” regardless of what is decided, Luca Ascoli, Eurostat’s director of government finance statistics, said in a hearing at the Italian parliament on Feb 14. 

While the “superbonus” gave rise to widespread fraud and runaway spending, it also contributed to Italy’s rapid rebound from the pandemic slump. The construction sector was one of the key drivers of economic growth in 2021, with a 21.3 per cent expansion. BLOOMBERG