Italy eyes budget gap around 10% of GDP in 2020, above 3% in 2021: source

ROME (Reuters) - Italy will target a budget deficit of around 10% of national output in 2020, and the gap will remain above 3% in 2021, a senior official said, as it readies a new stimulus package to soften the economic impact of the coronavirus crisis.

Until the outbreak, 3% of gross domestic product was the limit for European Union countries under the bloc’s budget rules. The EU has suspended this threshold to allow its members to spend more to fight the pandemic.

Italy, which has been one of the hardest hit in the world by COVID-19, will present new multi-year economic forecasts later on Thursday or on Friday.

Asking not to be named, the source told Reuters the government would seek authorisation next week from parliament for a new spending package that will increase the deficit by 55 billion euros ($59.5 billion), driving it to about 10% of gross domestic product or slightly above.

“The deficit target will remain above the EU’s ceiling of 3% next year,” the source added.

Italy had pencilled in an automatic increase in sales tax due to kick in next January, but the coalition of the anti-establishment 5-Star Movement and the centre-left PD party says it will be scrapped.

Instead of offsetting the tax hike with alternative levies and spending cuts, the government may simply forego the revenues from the tax hike and allow the 2021 deficit to rise by a further 20 billion euros, a second source said.

Italy began the year with a 2020 deficit target of 2.2% of GDP after registering 1.6% in 2019, its lowest in 12 years.

But the nationwide lockdown to fight the epidemic has pushed the euro zone’s third largest economy into its worst recession since the World War II, with an expected GDP decline of around 8% this year.

In its forthcoming stimulus package, Rome plans to boost funds to supplement the income of the self-employed and workers temporarily laid off, government officials have said.

A new compensation scheme will help small and very small companies whose turnover has been hit by the lockdown.

Italy’s public debt, which tops 2.4 trillion euros and is one of largest in the world, is targeted to jump above 155% of GDP this year from the 134.8% reported in 2019. The country’s Debt Management Office has said it will step up bond issuance to meet its increased funding needs.

Reporting by Giuseppe Fonte, editing by Gavin Jones and John Stonestreet