ROME, April 18 (Xinhua) -- A warning from the Bank of Italy that the government's 2020 budget deficit might be far larger than expected sent financial markets reeling this week and prompted the country's minister of finance to assuage worries -- with limited success.
HIGHER-THAN-EXPECTED DEFICITS
The Bank of Italy, the country's central reserve bank, on Tuesday said the country's deficit next year could swell to as much as 3.4 percent of gross domestic product if the government refuses to raise the value-added tax. That is far above the 2.1-percent goal laid out in the guidance for the 2020 budget the government released three weeks ago.
The bank also predicted a deficit of 3.3 percent of the country's gross domestic product in 2021, barring unexpected economic growth or higher tax rates.
The bank's estimates for 2020 and 2021 are both far above the 3.0-percent fiscal cap for any three-year period in European Union member states that use the euro currency.
The news unnerved markets Tuesday, sending the yield on the benchmark ten-year government bonds to as high as 2.65 percent on secondary markets, their highest levels this month, and reversing a gradual decline in yields heading into Tuesday's trading. Higher yields raise the country's cost for borrowing money, further adding to the deficit.
"It was just a warning, but the statement from the bank of Italy worried investors who remember last year's budget fight," Francesco Daveri, a macroeconomist and the head of the business administration program at the SDA Bocconi School of Management in Milan, told Xinhua.
STRUCTURAL REFORMS NEEDED
In 2018, Italy locked horns with the European Commission over deficit levels in this year's budget. Commissioners called on Italy to keep the deficit within 0.8 percent of gross domestic product, while Italy wanted a deficit of 2.4 percent of gross domestic product.
After ten weeks of contentious negotiations the two sides agreed to a deficit of 2.04 percent of the country's gross domestic product, though lowered economic growth estimates mean the deficit will likely be at least 2.4 percent of the gross domestic product, as Italy originally asked for.
European media has speculated that the higher-than-expected deficit levels this year mean commissioners will take a harder line with Italy when negotiations for the 2020 budget get underway in a few months.
"A higher deficit would be a big problem, but the cause of the problem is the lack of economic growth," said Lucio Poma, an economist with the University of Ferrara and the scientific director of the Industry and Innovation section at the economic studies firm Nomisma.
Italy's economy shrunk during the second half of 2018, and reviews are mixed on whether it will show even modest growth when figures for the first quarter of 2019 are released this month.
"If the economy were growing, then the deficit would be smaller as a percentage of the economy," Poma said in an interview. "This isn't a question of the effects of trade or tax rates. The budget can't be cut any more than it has been; there's hardly anything left to cut. Italy needs structural reforms that can spark economic growth."
GOV'T TO STAND BY PLEDGE
Giovanni Tria, Italy's minister of finance, spoke Wednesday in part to tamp down fears sparked by the Bank of Italy comments.
Tria said the government would look for ways to stand by its pledge to avoid an unpopular increase in the country's value-added tax "while waiting for alternatives" to replace the revenue the tax would provide.
"We will evaluate alternative measures," Tria said in parliament. "Everything we do will have to confirm the compatibility of the budget objectives."
"Basically, Tria was saying 'We want to find a way to avoid the 3.4-percent deficit without raising the value-added tax,' but he didn't provide details," Daveri said.
Markets had a lukewarm response to Tria's remarks: yields on the ten-year bonds started lower but again touched the 2.65-percent threshold before ending the day slightly lower. Enditem
