News Analysis: Italy's 2016 budget looks to spark growth while risking EU ire

Italy's 2016 tax-cutting national budget plan is a bet that the country's moribund economy will start growing sooner rather than later, experts told Xinhua.

Italy's parliament approved the risky budget plan last week, setting up a potential collision course with European Union regulators who could choose to sanction Italy for easing government deficit and debt targets previously agreed to.

The budget plan abolishes an unpopular tax on homes, provides tax breaks to farmers and companies that invest in infrastructure, and a monthly financial bonus for soldiers and law enforcement officials.

Italian Prime Minister Matteo Renzi is hoping Brussels will ignore the fact that Italy's massive public debt, at 133 percent of the country's gross domestic product, is the second highest in the European Union behind only Greece in order to see the slow growing Italian economy pick up steam.

"Over the long haul, Italy can only make significant progress on lowering debt if the economy starts growing at a healthy clip," Javier Noriega, chief economist with Hildebrandt and Ferrar investment bankers, said in an interview. "There's a calculated risk that the right combination of incentives can spark growth before the debt problem worsens too much."

The Italian economy is already showing some signs of life. The latest International Monetary Fund (IMF) models show the Italian economy growing a modest 0.8 percent this year. If that holds, it means 2015 will be the first year Italy's economy showed positive growth since 2011, when it grew 0.6 percent, and the first time it grew in every quarter since 2007.

But economists told Xinhua the economy probably needs to grow more than the IMF's prediction of 1.3 percent next year in order to justify the budget plan.

"The primary surplus will be smaller in 2016 than in 2017 and 2018 unless there is an increase in economic activity and tax revenue," Giampaolo Arachi, a professor of public finance from the University of Salento, said in an interview.

A country's primary surplus is the difference between a government's spending, not including interest payments on its debt, and revenue from taxes and other sources. It is a measuring stick for a country's fiscal health.

Arachi said what Italy's economy needs most is an increase in investment. That is something the new budget plan seeks to address, with incentives for companies and farmers to invest in new equipment or machinery.

The budget plan could still be rejected in Brussels. In November, the EU warned Italy and three other states that budget rules could run afoul of rules, and it urged the Italian government to adjust the budget to bring it more in line during parliamentary debate.

Instead, the budget became more expansive during the debate process. The EU is expected to make its judgment in May - nearly midway through the year. That raises the possibility that any EU conditions tied to the 2016 budget could go into effect in 2017, further increasing the need for growth in 2016. Endit