ING global economic outlook 2023 December 2022 3 Italy: Temporarily investing in credibility capital The new Meloni government has so far adopted a prudent approach to fiscal policies, preferring continuity over disruption. The draft budget, still under discussion, is a case in point. It prioritises tackling the energy price emergency with a piecemeal approach (it is funded in deficit until the first quarter of next year), limiting outlays for other items such as pensions, the reduction of the tax wedge and the flat tax. Crucially, it does so while already targeting a sizeable adjustment in 2023, when the Stability and Growth Pact (SGP) will still be suspended. In the year of the SGP's reform, accumulating political credits will be essential in order to have a say in the bargaining process. Such credibility capital might also help to manage possible issues related to the difficult implementation of the increasingly relevant investment part of the recovery and resilience plan. Given such a potentially high payoff, we believe the government will try to stick to prudence at least over 1H23, accepting in the process the collateral damage of a soft recession, which might be over in the second quarter of 2023.