The new Italian government needs a "credible" plan to make the country's finances more sustainable in the medium term, a member of the International Monetary Fund (IMF) told CNBC Tuesday.
The recently-established coalition in Rome, formed by the Five Star Movement (M5S) — which promotes more benefits for citizens — and the Partito Democratico (PD) — a pro-European social democratic party — raised its deficit forecasts for 2020 on Monday. The government foresees a budget deficit of 2.2% of the country's gross domestic product (GDP) in 2020, instead of 2.1% of GDP which was a commitment outlined earlier this year.
The structural deficit, which removes growth fluctuations, is set to rise to 1.4% in 2020 from 1.2% this year, according to Reuters.
"Whatever Italy does right now it needs to be anchored to a credible medium-term plan for fiscal consolidation," Poul Thomsen, the head of the IMF's European department, told CNBC's "Street Signs" on Tuesday.
There is a lot of focus on the Italian budget plans for 2020 — due to be sent for oversight in Brussels by October 15. This is after the previous government in Rome challenged the European fiscal rules, sparking market jitters.
Investors and the European Commission, which checks the fiscal plans of the various member states, want to understand if Italy is committed to reducing its massive debt pile. Rome's public debt stands at about 132% of GDP — the second highest in the euro zone.
Thomsen told CNBC that Italy also needs to address its lack of productivity — a measure of labor market efficiency. "Without solving that, Italy will never solve its fiscal problem."
Productivity growth has been weak for almost two decades, holding back the overall economic performance of Italy. However, Thomsen said that the new leadership "understands" the issues facing the economy.
"We so far (have) had limited contact with the new government, but what I hear certainly suggests the it understands what the issues are," he said.
