Understanding Budget Deviation and Its Significance

Understanding Budget Deviation in Public Finance

Budget deviation is a crucial concept in public finance and economic management of a country.
It is often discussed in conjunction with the budget law, as it certifies the government’s ability to effectively manage its budget.
Let’s delve deep into the characteristics of budget deviation, not only to define its terms and meanings but also to understand its implications within a broader financial and political analysis.

What is Budget Deviation: Meaning and Definition

Budget deviation refers to a variation in budget objectives compared to those set during the budget approval.
It is an indicator that can reveal a lot about a country’s fiscal health and the government’s ability to predict and manage its revenues and expenditures.
In simple terms, it represents a change from the trend situation under current legislation.

The purpose of budget deviation is to address an economic emergency.
For instance, during the COVID-19 pandemic, the Italian Government, among others, frequently resorted to this tool.
However, periodic discussions on budget deviation arise, notably following the approval by the Parliament to secure funds for the 2024 Budget Law.

Budget Deviation in Parliament and Recent History in Italy

The state budget serves as an economic planning tool reflecting a country’s political priorities and development objectives.
A significant budget deviation may indicate management issues, forecasting errors, or sudden changes in economic conditions.
While primarily used in public finance, the concept of budget deviation also applies to other economic and business settings.

In Italy, the government requires parliamentary authorization to increase the deficit beyond what was initially envisaged.
Approval of budget deviation can impact the State’s net borrowing.
The deficit holds immense importance for Italy and other countries with high public debt, especially after the 2009 Greek crisis led to stricter financial regulations within the EU.

Conditions Leading to Budget Deviation

Before delving into how budget deviation works, it’s essential to discuss the Medium-Term Objective (MTO) for the structural budget balance that each EU country commits to achieving over a specified period.
While deviations from this scheme are allowed under extraordinary circumstances, they require parliamentary approval and consultation with the European Commission.

Budget Deviation in the Parliament Decision-Making Process

Parliamentary authorization for budget deviation is a pivotal step in the decision-making process.
The government must present a report detailing the economic policy measures necessitating budget deviation.
The parliamentary procedures involve multiple steps, culminating in a majority vote from both Chambers.

Budget Deviation in Italy’s Recent Legislations

Italy was among the first economies impacted by COVID-19, leading to substantial budget deviations for various relief measures.
The government sought and received parliamentary approval for multiple deviations to address the pandemic’s effects.
During the 18th legislature (2018-2022), 12 budget deviation requests were presented, reflecting both domestic and international crises.