During 2012, the Italian Parliament approved a number of important legislative measures, such as the Constitutional Law 1/2012 and Law 243/2012 which reformed Article 81 of the Constitution by introducing and subsequently detailing the principle of a balanced budget. According to the new legislation, which follows the principles of the Stability and Growth Pact as amended by the so-called Six Pack, the budget is in equilibrium when in structural terms (net of the cyclical components and one-off measures) the medium-term objective (MTO), equal to a balanced budget, is reached.
This new legislation shifts the emphasis of fiscal surveillance evaluations of program objectives measured in structural terms, i.e. adjusted for the economic cycle and one-off measures.

The estimates of potential output and the output gaps of the Italian economy necessary for the calculation of the cyclical component of the structural balance are based on the application of the production function methodology for the derivation of potential output and the output gap as agreed at European level and approved by the EU Council. This methodology is regularly discussed and reviewed within the EU's Economic Policy Committee and the Technical Group Output Gap Working Group (for more information see: D'Auria et al., 2010, The production function methodology for calculating potential growth rates and output gaps, European Economy, Economic Paper No 420).

The technical specifications of the estimate of the output gap and structural balances are reported in this section.