Italy’s fiscal deficits for the past three years have widened sharply, after changes to the methods, and timing, of accounts for a generous “Superbonus” tax credit scheme that revitalised the construction industry in the depths of the coronavirus pandemic.
Istat, the official statistical agency, on Wednesday raised its 2020 fiscal deficit calculation to 9.7 per cent of gross domestic product, up from 9.5 per cent. It increased the 2021 fiscal deficit to 9 per cent of GDP, up from 7.2 per cent. The agency also said the fiscal deficit for 2022 had risen to 8 per cent of GDP, well up from previous projections of around 5.5 per cent.
Istat said the revisions followed new guidance from Eurostat, the EU statistics agency, on how to account for tax credit schemes.
The restatements come at a sensitive time for Prime Minister Giorgia Meloni’s rightwing government, which is eager to display fiscal prudence to avoid destabilising sovereign bond markets. Italy’s 10-year government bond price fell slightly in Wednesday trading, pushing yields up 0.045 per cent to above 4.5 per cent for the first time since January, as investors said the changes had been widely expected.
“It’s just an accounting treatment change — it’s nothing fundamental,” said Lorenzo Codogno, a former director-general of the Italian treasury.
Italy’s popular Superbonus scheme, first launched in 2020, offered property owners generous tax credits to encourage them to enhance their homes’ energy efficiency. The credits, valued at 110 per cent of the work undertaken, were tradeable between parties.
In its latest tax manual, Eurostat laid out more detailed criteria for the accounting of such schemes, linked to their transferability to third parties, deferability over time and their use in offsetting other taxes.
Istat said the revisions to the scheme did not affect the total financial burden on the public exchequer, but rather the timing, as the financial hit would now be taken upfront, rather than spread across future years.
The finance ministry on Wednesday reiterated its commitment to “ensuring a sustainable exit from the Superbonus scheme”, which is due to expire at the end of this year.
Meloni’s government has already reduced the tax credits under the scheme for this year from 110 per cent to just 90 per cent. In mid-February, the government also announced that the tax credits would no longer be transferable, causing a furore among construction companies, which are holding an estimated €20bn of such tax credits, passed on to them by homeowners renovating their properties.
The ministry said it was working with the industry to solve a “serious financial liquidity problem” of companies sitting on frozen credits.
The changes to the Superbonus scheme rules were the “indispensable perquisite for the protection of public finances for 2023”, it added.
Ludovic Subran, chief economist at German insurer Allianz, contrasted Italy’s deficit revisions with the Greek restatement of its debt figures that sparked a eurozone financial crisis more than a decade ago.
“It can tentatively and very marginally affect how [Italy’s] fiscal credibility is perceived in the near future, but we’re not at all in a Greek story,” said Subran. “Meloni is more fiscally prudent than initially thought.”
Codogno said the changes could benefit Italy, as it raises deficits in a period when the Stability and Growth Pact — the EU’s budget rules that prescribe a public deficit limit of 3 per cent of GDP — has been temporarily suspended due to Covid-19. It is expected to resume in 2024.
“Effectively, Italy takes the hit in the period in which EU budget rules were not in place,” he said. “It makes for a larger improvement in future years, which is good.”
Italy recorded stronger-than-expected GDP growth of 3.7 per cent in 2022. Istat said on Wednesday. The growth was driven in part by the Superbonus-fuelled construction boom, as well as robust demand in the services sector and a strong rebound in tourism.