OECD Forecast Italy To Miss Deficit Target in 2007

In many ways this news is not exactly surprising, given the debate which has already taken place on the topic. The important question is likely to be, if the OECD are proved right, what will be the response from Moody's, Standard and Poor's and the other sovereign debt ratings agencies? The OECD take the view that:

Italy will fail to bring its budget deficit below the European Union ceiling for the fifth consecutive year in 2007, the Organization for Economic Cooperation and Development said.

Italy's deficit will reach 3.2 percent next year, the Paris-based organization said in its twice-yearly forecast. Prime Minister Romano Prodi's government is trying to approve a budget bill that aims to cut the deficit to 2.8 percent next year, below the EU's 3 percent ceiling for the first time since 2002.

The OECD faulted Prodi's budget for relying too much on increased revenue rather than spending cuts to tame the deficit, a criticism which led to the downgrade of Italy's creditworthiness by Standard & Poor's and Fitch Rating's last month. The budget includes 35.4 billion euros ($46.5 billion) in spending cuts and revenue-raising measures; a third of that amount will come from fighting tax evasion.

``In Italy, the fiscal adjustment is entirely due to higher taxes, with no serious attempt to cut spending,'' the OECD said in the report.

This last part is indeed a damning indictment.

We also need to take into account downside risk on the growth forecast, if the actual environment next year turns out to be harsger than many are imagining at present:

Growth in Italy's economy will slow next year to 1.4 percent from 1.8 percent this year, the OECD said. Europe's fourth-biggest economy will grow at around 2 percent this year, the fastest pace since 2000, Finance Minister Tommaso Padoa- Schioppa said yesterday.