BW Online | November 5, 2001 | Italy: These Budget Numbers Are a Pipe Dream

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NOVEMBER 5, 2001

BUSINESS OUTLOOK

Italy: These Budget Numbers Are a Pipe Dream

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Italy: These Budget Numbers Are a Pipe Dream

The Italian government's budget outlook was not good prior to the terrorist attacks in the U.S. Now, it's even worse.

The center-right government of Silvio Berlusconi presented its draft budget for 2002 in early October, projecting that the 2001 deficit would be 1.1% of gross domestic product, greater than its 0.8% goal. It stuck to its 2002 target of 0.5%. Most private economists say that's a pipe dream.

While the government's projection for economic growth this year of 2% is close to the general expectation, its forecast for next year, 2.3%, could well be more than a percentage point too high.

The economy stagnated in the second quarter as the global slowdown hit exports and manufacturing, even as consumer spending picked up. Now, global fallout from the U.S. slump will wield a further blow to foreign demand, and the already visible weakening in the labor markets will intensify, depressing consumer spending. For example, in early October, Fiat announced sharp production cutbacks and layoffs totaling 20,000 workers.

Budget forecasts are a moving target, since government numbers are sketchy. But based on the latest blueprint, analysts at J.P. Morgan Chase & Co. think the 2001 deficit could hit 2.3% of GDP, and the 2002 gap could touch 2.5%, unless the government goes forward with plans to sell a large amount of public real estate. Even then, the deficit would far exceed the 0.5% target. Moreover, Italy's pledge to the European Union to balance its budget by 2003 would be practically impossible.

Berlusconi could land in hot water at home, too. The 2002 draft budget does not include any of the 30 billion euros ($27 billion) in income tax cuts he promised during last May's election. It does, however, include spending cuts aimed at containing the deficit. The government has said that it may add the tax cuts to the final budget document, but only if the EU loosens next year's budget goals. Either way, Italy once again appears to be digging itself into a fiscal hole.

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