Italy's 2023 Fiscal Deficit Target Outlook Clouded by Elections and Recessionary Energy Crisis Risk

In response to the intensifying recessionary risk caused by the ongoing energy crisis, the Italian government is planning further support to the economy. Recent energy-related measures will likely not affect the deficit target this year, but there is high uncertainty starting with 2023. The general election is approaching and the new government could propose some expansionary measures along with further required support to mitigate the prolonged economic impact of the energy crisis.

In DBRS Morningstar's view, Italy's new government could struggle to strike a good balance between protecting the economy and repairing the fiscal accounts. In our assessment, targeted and temporary measures will be important to preserve market confidence. This commentary considers the risk of an adverse shift in the fiscal trajectory in the light of the energy crisis and the policies advocated by leading parties.

Key Highlights
• High energy prices are prompting further government support, but the fiscal deficit target should be met in 2022.
• While growth for 2022 should be in line with the government's latest projections, recessionary risks are intensifying and could likely carry over into a weak Q1/Q2 2023 performance.
• Economic deterioration coupled with further fiscal support in 2023 will translate into slower fiscal consolidation.
• Risks are exacerbated by the possibility that tax reform or further subsidies prove to be non-neutral. Measures that are fiscally costly and are not temporary and well targeted could trigger higher financing costs.

“The next government could struggle to deliver on expansionary electoral promises in 2023, there could be other priorities,” said Carlo Capuano, Senior Vice President Sovereign Ratings. “Fiscal space could be limited by lower economic growth, rising yields and likely further energy-related support unless the deflator is significantly higher than expected.”