Silvio Berlusconi’s centre-right government is preparing cuts and revenue-raising measures for the next two years with the aim of balancing Italy’s budget by 2014.

Officials said the programme was in line with EU consultations and denied reports that legislation had been brought forward to calm anxious markets after Standard & Poor’s, a rating agency, cut its outlook for Italy’s A+ rating to “negative” from “stable” on Saturday.

“It was already planned. There is no S&P effect,” a finance ministry official in Rome said.

Officials said the legislation could be ready by the end of June.

Although Italy’s budget deficit is modest compared with most of its eurozone peers, its growth prospects are weak, and what S&P called “potential political gridlock” has refocused attention on the country’s long-term ability to reduce its public debt levels from the current 120 per cent of GDP.

Economists estimate the government needs to reduce the deficit by €35bn-€40bn by 2014. One senior official, who asked not to be named, agreed with that estimate. However, another suggested it was too high and that actual cuts would be considerably smaller, with increased revenues expected from a continued crackdown on tax evasion.

Cuts would focus on government spending, “redundant” semi-official entities and “the cost of politicians” in terms of subsidies and salaries.

“We have held firm and we will continue to hold firm,” Giulio Tremonti, finance minister, declared on Monday in response to the move by Standard & Poor’s, which other rating agencies said they did not intend to follow.

Over the weekend Mr Tremonti released a statement saying the government planned to “intensify reforms” and would publish details of how it intended to balance accounts – as planned – by 2013-14.

Italian spreads over German government debt widened in early trading but narrowed again later in the day. Economists said initial concern raised by the S&P report had dissipated, although Milan’s main stock index closed 3.3 per cent down on the day.

Analysts said any move by the government to accelerate pro-growth reforms and provide details of the deficit reduction plan would be beneficial.

“Conversely, delays on the implementation of reforms, as well as signs that activity remains sluggish and below expectations, would weaken Italy’s position,” said Giovanni Zanni, economist for southern Europe at Credit Suisse.

A report issued on Monday by Istat, the state statistics agency, underlined Italy’s chronic weakness, noting that GDP had grown by an average of only 0.2 per cent a year over the past decade against the 1.1 per cent eurozone average.

“The growth rate of the Italian economy is totally unsatisfying,” said Enrico Giovannini, president of Istat.

Although there were signs of a recovery in employment levels and demand for labour, these did not seem sufficiently strong and widespread to reabsorb rising unemployment, relaunching income and consumption, Mr Giovannini said.

“The Italian system seems vulnerable, even more vulnerable than before,” he added.

Barclays economists said that, while they agreed with the point about long-term GDP prospects, “Italy has been one of the countries in the euro area where public accounts have deteriorated the least since the beginning of the economic crisis.”

They added: “Since the beginning of August last year when political tensions within the centre-right were exacerbated, parliament has managed to approve fiscal austerity measures and the 2011 budget law.”

The Italian banking sector has mostly weathered the crisis better than eurozone peers and is undertaking a heavy round of recapitalisation ahead of new global capital rules.

Additional reporting by Giulia Segreti

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