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Italy’s Welcome Gift to Meloni Will Be Worse Economic Outlook

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If Brothers of Italy Leader Giorgia Meloni and her alliance win Sunday’s election, they won’t need to wait long for a picture of just how far the country’s economic outlook has soured.

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(Bloomberg) — If Brothers of Italy Leader Giorgia Meloni and her alliance win Sunday’s election, they won’t need to wait long for a picture of just how far the country’s economic outlook has soured. 

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Officials are busy preparing new forecasts for growth, debt and the deficit as part of an abridged budget that must be published within days of the vote by the outgoing government of Prime Minister Mario Draghi. 

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The projections show the economy expanding just 1% next year, less than half the 2.4% prediction released in April, according to people familiar with the matter, who declined to be identified because such details are confidential. 

The lower growth forecast will have a negative impact on the deficit. That will intensify the challenge for the right-wing coalition that is likely to be formed in the weeks after the election, if its outcome matches polls conducted before a blackout period. 

Even then, such an outlook remains far above the consensus for how bad growth will really get. A survey of 34 economists conducted by Bloomberg sees the Italian economy expanding just 0.4% next year, down from 3.3% in 2022. 

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Draghi and Finance Minister Daniele Franco have said in recent weeks that for now, Italy can avoid an economic contraction. The premier has also noted that higher tax revenue partly boosted by accelerated inflation has given a small boost to the public finances.

That may be a small comfort for the new government, which will face a worsening economic outlook laden with uncertainty. Russia’s invasion of Ukraine, energy price hikes, rampant inflation and rising interest rates are all combining to hurt growth.

A weaker outlook for expansion implies less fiscal room for interventions to help families and businesses cope with the current crisis, unless politicians resort to adding to the country’s huge debt load. Italy has so far spent about 66 billion euros ($65.4 billion) to protect its economy. 

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Meloni has vowed to keep the public finances in check, but she has also promised to protect Italians from the worst of the energy squeeze. With costs rising and no visible end to price pressures, that will be a difficult balancing act. 

Even just extending tax breaks to companies that use a lot of energy until the month of December would cost almost 5 billion euros, one of the people said. About 30 billion euros may be needed very soon just to keep spending at current levels, and politicians’ promises during the electoral campaign may push that figure upwards, the people said.

The odd juxtaposition of the election and the draft budget for approval by the end of the year is one explanation why Italy’s political system normally avoids elections at this time of year. 

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