Lower tax revenue and new spending plans will result in higher borrowing costs, undermining private investment
Although polls suggest a far-right coalition will win a comfortable majority, it isn’t expected to garner the 75% of votes needed for it to enact any constitutional changes. However, MNCs should still plan for meaningful policy shifts under a new government. Tax changes and expanded aid to both families and targeted industries could boost B2C and B2B demand, while B2G firms could benefit from the simplification of public procurement processes and planned investments in physical and digital infrastructure. Despite the coalition’s stated commitment to fiscal responsibility, the election is expected to rattle markets, with adverse consequences for the country’s borrowing costs and business confidence, which would undermine the economic benefits associated with the coalition’s spending plans.
Overview
The collapse of Mario Draghi’s coalition government in July pushed Italy’s president to call an election for September 25. This is highly unusual given that Italy finalizes its budget for the following year in the fall, making the outcome of this election even more consequential for Italy’s near-term growth prospects. Unfortunately, the center-left Democratic Party’s attempt to form a coalition has proved unsuccessful, virtually guaranteeing a victory for the far-right. As a result, the far-right’s election manifesto can now be read a sneak peak of Italy’s 2023 budget, with implications for B2B, B2C, and B2G demand as well as EU-Italian relations
Our View
Accelerating inflation has dealt consumers’ purchasing power a substantial blow over the last several months. With price growth expected to remain historically elevated into 2023, the right-wing coalition has promised numerous initiatives to alleviate the financial pinch on households. For example, it would expand free nursery schools, reduce the VAT on energy as well as goods and services for children, and provide additional aid for separated or divorced parents. Additionally, pensions would rise, and households could benefit from new universal subsidies. However, MNCs should still plan for heightened price sensitivity among consumers, with downtrading likely for some FMCGs, especially among lower/middle- and lower-income households.
Targeted initiatives could help support B2B firms that specialize in supporting the construction and agricultural sectors. The coalition would maintain tax breaks that incentivize home renovations and invest in modernizing school buildings, transportation stations, roads, and parks. B2B demand could also get a boost from expanded loan guarantees and aid for farmers. However, MNCs should note that any attempt by the government to support private investment could be outweighed by rising interest rates and weaker business and consumer confidence.
The manifesto’s spending plans would also create new opportunities for B2G firms. Public procurement processes would be streamlined and—alongside the digitalization of public administration—potentially reduce some of the costs associated with B2G projects. In terms of specific projects, B2G firms could benefit from investments in renewable energy, high-speed rail networks, and broadband. Healthcare spending would likely increase under the coalition, with much of this expenditure allocated to increasing the healthcare workforce, expanding access to local healthcare, and improving predictive medicine.
Unfortunately, the combination of tax and spending initiatives would undermine Italy’s growth prospects. The introduction of a flat income tax would be regressive and, alongside planned VAT cuts, would shrink government revenue. This would put upward pressure on the deficit, further increasing borrowing costs and reducing business confidence.
Prospects for Italy’s relationship with the EU are similarly downbeat, with the potential to further weaken business confidence and investment. The manifesto includes a commitment to Italy’s international partnerships, specifically citing support for Ukraine. Yet, Matteo Salvini, leader of The League, stated last week that the EU should consider lifting sanctions on Russia. Italy and the EU would likely also butt heads over the coalition’s desire to alter Italy’s recovery and resilience plan, which could delay the disbursement of EU funds. Lastly, the EU is set to negotiate reforms to its debt and deficit rules. The coalition is expected to push more aggressively for a broader weakening of those rules. However, it lacks the credibility of Draghi’s government and could prove less adept at negotiations.
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