Last month, the caretaker government in Italy proposed a budget which forecast the elimination of Italy's fiscal deficit by 2021.
The arrival of a radical new coalition government with plans to cut taxes and increase spending changes all that.
Debt investors have seen their concerns reflected in sovereign debt markets, with the yield on Italian government 10-year bonds jumping to 2.43% compared to 1.79% at the end of April, and a further widening in the premium over German government 10-year bunds, which currently yield 0.50%.
The real issue is the scale of Italy’s accumulated debts. At €2.3tn, or 132% of GDP, Italy’s gross public sector debt is one of the largest in the developed world and is almost three times annual government revenues. Tackling that debt mountain has been the main focus of recent Italian governments, under the watchful eye of the other Eurozone finance ministers and the European Central Bank.
Although not good news from a public finance perspective, there is a silver lining for the UK. Philip Hammond's plan to eliminate the UK’s fiscal deficit may have slipped to the ‘mid-2020s’, but at least the prospect of being beaten to that achievement by his Italian counterpart appears to have receded.
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