WASHINGTON (Reuters) – Italy’s fiscal stimulus plans would leave the country vulnerable to higher interest rates that could ultimately plunge it into recession, the International Monetary Fund warned on Tuesday, recommending instead a “modest” fiscal consolidation to reduce financing costs.
The IMF said after an annual staff review of Italy’s economic policies that any temporary, near-term growth gains from the stimulus is likely to be outweighed by the “substantial risk” of a rapid deterioration.
“Materialization of even modest adverse shocks, such as slowing growth or rising spreads, would increase debt, raising the risk that Italy could be forced into a large fiscal consolidation when the economy is weakening,” the IMF said. “This could transform a slowdown into a recession.”
Italy’s coalition government has proposed a 2019 deficit of 2.4 percent of gross domestic product, three times the previous administration’s target.
The IMF projects a higher 2019 deficit of 2.66 percent of GDP with the stimulus, rising to 2.8-2.9 percent in 2020-2021.
The spending is meant to finance the campaign promises of the ruling parties – the anti-establishment 5-Star Movement and right-wing League – to lower the retirement age, cut taxes, invest in infrastructure and boost welfare.
Italy has the largest debt among big European Union economies, at 131 percent of GDP, and it is under pressure from the EU to rein in spending amid fears it could sow the seeds of a new debt crisis in the euro zone.
The IMF said medium-term growth is likely to be negative if the stimulus is not offset by additional revenues.
The Fund said it recommended that Italy gradually reduce spending while economic conditions remain favourable, aiming for a “small overall surplus in 4-5 years.”
(Reporting by David Lawder; Editing by Andrea Ricci)