Italy: Tax Breaks, Investment Delays, Rising Debt-to-GDP Increase the Need for Fiscal Consolidation

Source: Scope Ratings

Superbonus: Fading Impact on Fiscal Deficits, but Increasing Negative Effects on Debt Levels

The estimated EUR 135bn of needed fiscal consolidation is slightly higher than the cost of tax incentives granted to-date for building renovations aimed at improving their energy efficiency, known as the Superbonus, which has resulted in EUR 122.2bn of tax credits. The scheme has significantly contributed to the elevated, if temporary, impact on the general government deficit of 8.6% of GDP in 2022 and 7.4% in 2023 and will lead to higher debt-to-GDP in 2024-26.

Recent estimates from the Italian Fiscal Council show an average yearly debt increase related to the Superbonus of almost 2pp in the next three years, compared with an average 0.5pp increase in 2021-23. A recent proposed amendment to the measure would extend the tax credits from five to 10 years for renovation work carried out from 2024, spreading the impact on public debt over a longer period.

The Superbonus underpinned new real-estate investment of EUR 117.2bn and almost 40% growth in construction-sector activity in 2020-23. While the tax incentives raised GDP by around 2.4pp over 2021-24, according to estimates by Confindustria, much of this economic benefit will prove temporary and is unlikely to offset the underlying fiscal costs.

RRP: Spending Delays Threaten Full Implementation, Reducing Economic Benefit

Italy’s RRP continues to face spending delays and implementation challenges, casting doubt over whether all planned investments can be realised by the end of 2026. Spending remains comparatively low at 23%, or EUR 45bn of the EUR 194.4bn allocated, up to end-March 2024, despite the reception of 53% of all grants and loans to date.

Most investment is now due to take place in 2024-26, equivalent to EUR 150bn or around 7% of GDP, assuming no extension to the 2026 deadline by the EC. Pressure on Italy to identify and start projects more quickly increases the risk of operational and governance bottlenecks. Longer delays could limit the potential boost from the plan to medium-term growth, which is crucial for stabilising Italy’s debt-to-GDP.

Eiko Sievert is a Director in Sovereign and Public Sector ratings and member of the Macroeconomic Council at Scope Ratings GmbH. Alessandra Poli, Analyst at Scope, contributed to writing this article.

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