After the fall of the Draghi government in July, Italy will go to the polls on 25 September. Polls point to a center-right parliamentary majority as the most likely outcome with the leader of Fratelli d’Italia, Giorgia Meloni, who could become the next prime minister.We don’t believe that a right-wing coalition victory necessarily implies that the next government will be routed collision with the EU say Fitch analysts. Meloni is trying to reassure voters and international partners that she will work constructively with the EU. “We expect a center-right government to aim at reducing the tax burden, redesigning the citizenship income system and increasing pension spending.”
How the new government will behave with public accounts
However, the fiscal policy of the next Italian government will have to adapt to rising interest rates and the energy crisis if it is to reduce public debt, says Fitch Ratings in a new report. Fitch’s analysis suggests that if 10-year government bond yields remain close to 4%, higher primary balances will be needed to keep the debt ratio on a downward path. Each party supports the need to reduce taxes, but also to raise minimum pensions and to introduce new provisions for early retirement. These proposals would involve some fiscal easing and continue the Draghi administration’s strategy of prioritizing growth and reducing consolidation. However, the implementation of these policies will be complicated by the energy crisis and rising interest rates. The 2023 budget law will help assess the orientation of fiscal policy and will likely focus on protecting households and businesses from the energy shock.
Fitch’s updated simulations show the impact of changing economic circumstances and rising sovereign yields. If the returns stay around 4%, the debt is stable at around 150% of GDP. A second scenario, consistent with the September Global Economic Outlook forecasts, which foresees a recession in 2023 due to the energy shock and poor consolidation, sees the debt / GDP ratio rise to 157% by 2031. In a third scenario, in where debt relief is a priority, the ratio decreases by 10 percentage points.
FDI leader Giorgia Meloni is listed as the likely next Prime Minister and says she will work constructively with Brussels. “We believe the eligibility requirements for it the ECB’s transmission protection instrument (the ICC) incentivize the next government to keep fiscal policy broadly in line with EU rules, ”Fitch argues.