0655 GMT October 18, 2019
The warning from the central bank comes at a time when tensions between the Italian government and the European Commission, which oversees fiscal policy across the EU, are running high, CNBC reported.
Earlier this week, Brussels sent a letter to Italy, asking the government to explain why the country’s debt did not come down in 2018.
“To confine ourselves to seeking temporary relief by raising the public deficit could prove less than effective, even counterproductive, if this led to a deterioration in financial conditions and in the confidence of households and firms,” the Bank of Italy said in its annual report on Friday.
The central bank added that the risks of higher spending ‘must not be underestimated’.
The current coalition government, in power for about a year, vowed to increase spending to boost the Italian economy. As a result, it has put forward initiatives such as a citizens’ income (which aims to help out the poorest) and plans to lower the retirement age.
Such spending plans have raised eyebrows in Brussels, given that Italy has the second highest debt pile in the European Union.
The European Commission alerted Rome since last autumn that it had to bring down its deficit target for 2019 in order to reduce its debt pile. They both agreed to lower the government’s initial deficit target from 2.4 percent and 2.04 percent at the end of 2018.
However, the Italian government has had to revised upwards that target earlier this year.
The Bank of Italy also said that the high debt levels in Italy continue to be a ‘severe constraint’.
“Compared with the rest of the euro area, the cost of Italy’s public debt is higher and its economic growth lower,” the central bank said in its report.
According to data from the European Commission, released earlier this month, Italy’s debt pile is set to reach 133.7 percent of GDP this year and to increase to 135.2 percent in 2020.
The government’s plans and its battle with the EU over spending has sparked some volatility in the bond market, leading to higher yields. The Bank of Italy warned Friday that such bond market moves ‘are curbing growth prospects’.