The Fitch Ratings agency on Thursday confirmed Italy's long-term default rating (IDR) at AA- with a 'stable' outlook.
''There is no denying that Italy's fiscal and economic performance has improved over the last year, but the easing in the policy stance is disappointing,'' observed Brian Coulton, Managing Director in Fitch's Sovereign Group.
''The origins of the revenue improvement are uncertain and the government has been a little too keen to give the unexpected increase in revenue back in the form of higher expenditure,'' he added.
Fitch recalled that Italy's budget deficit is expected to decline to 2.4% of GDP in 2007, compared to 4.4% in 2006, which would have been 3.7% without the impact of a European Court of Justice ruling on company car taxation.
Italy's public debt this year is expected to decline to 104.9% of GDP, down from 106.8% at end of 2006, Fitch added.
According to Fitch, ''tax increases in Italy's 2007 budget played a significant part in this improvement, but there has also been a sizeable improvement in tax elasticity. It is as yet unclear how much of the latter reflects substantial efforts to reduce tax evasion or cyclical effects''.
''However, the government has responded to the revenue improvement by abandoning previous plans to tighten fiscal policy further by 0.7% in 2008 and instead now targets easing measures of 0.4% of GDP next year,'' the agency said.
Italy maintains a deficit target of 2.2% in 2008, Fitch reported, ''which should deliver further modest declines in the debt ratio, supporting our stable outlook and allowing Italy to graduate from the European Union's Excessive Deficit Procedure next year''.
Nevertheless, ''the failure to devote revenue windfalls to faster deficit reduction is disappointing from the perspective of achieving more secured and substantive declines in public debt,'' Fitch said.
Looking back over the past year, Fitch observed that while ''there have also been signs of greater economic dynamism, improved export competitiveness and a number of measures to liberalise product markets, it would be premature to revise estimates of medium term GDP growth potential beyond the 1.25-1.5% range''.
Short-term growth, Fitch warned, ''could weaken due to external factors and public finances remain vulnerable to economic shocks''.
