Italy’s Budget Deficit Shrinks, Easing Debt Concerns Amid Slower Growth
Italy’s primary balance for 2024 proved to be better than expected, mitigating the increase in the public-debt ratio.
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THE CONTEXT
Istat has published annual data on Italy’s finances for 2024, which conveyed positive news. The budget deficit declined significantly from 7.2% of GDP to 3.45% (compared to the government’s forecast of 3.8%) and the public-debt-to-GDP ratio rose by just 0.7pp to 135.3%. The resumption of an upward trend in the short term was widely expected.
THE DATA
Our chart illustrates the progress of Italy’s public finances from 2019-2024. The eye-catching achievement is the improvement in the primary balance from a large deficit to a small surplus (0.4% of GDP) last year. A significant reduction in capital expenditure, which was inflated by the impact of the housing bonus in the period 2021-2023, contributed to the sharp decline, while a slightly better revenue figure explained the positive surprise. Interest expenditure was 3.9% of GDP, with the cost of overall debt at close to 3.0%.
Despite the good news in terms of the primary balance, the public-debt-to-GDP ratio rose in 2024 following three consecutive years of sizeable declines. This was due to 1. slower nominal GDP growth, as price increases moderated last year and 2. a higher cash deficit related to housing tax credits accumulated in the previous three years.
OUR VIEW
Italy’s budget-deficit dynamic is moving in the right direction, and this will help the country in its downward adjustment process. Last autumn, the government committed to lowering the deficit to 2.8% of GDP by 2026, which we regard as achievable. This implies improving the primary surplus towards 1% of GDP, which would bring it closer to the 30-year average of about 1.5% of GDP. As the constructive market view on Italy’s sovereign yield is expected to support debt affordability, the main risk is related to growth, as the complex geopolitical situation might weaken economic activity.
We now expect real GDP to expand by 0.7% this year, much less than the government’s 1.2% forecast last autumn. This will also be crucial for the dynamics of the debt ratio and the budget deficit. The debt ratio is expected to rise until 2026, when the negative impact of the housing bonus will start to fade – this is already factored in by investors and rating agencies.
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