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Italy government agrees to spend big with deficit hike
MILAN, Sept 28, 2018 (BSS/AFP) – Italy’s populist government agreed
Thursday on a deficit of 2.4 percent of gross domestic product for the next
three years in a move which risks setting Rome on a collision course with the
European Commission.
“We’re satisfied, this is the budget of change,” joint deputy prime
ministers Matteo Salvini and Luigi Di Miao said in a statement after securing
a last-minute victory over the country’s more cautious finance minister.
The deficit is set at 2.4 percent for 2019, 2020 and 2021.
The figure, vastly higher than the 0.8 percent forecast by the previous,
centre-left government, will inflate the country’s already mammoth debt
burden — currently 131 percent of GDP, the biggest in the eurozone after
Greece.
There were cheers from flag-waving members of the anti-establishment Five
Star Movement outside the prime minister’s offices in Rome, as their leader
Di Maio left the cabinet meeting, shouting “We did it!”
The decision follows weeks of suspense over whether Western Europe’s first
anti-establishment leadership would defy Brussels with its first budget to
uphold its costly electoral promises.
Finance Minister Giovanni Tria, an independent, had attempted to set an
upper limit of 1.6 percent but was forced to back down. His capitulation came
just hours after rumours he would be forced to resign if he refused to play
ball.
The 2.4 percent figure “suggests that Mr Tria is not the moderating force
that some had assumed, and will raise question marks over his future,” said
Jack Allen, Senior European Economist at Capital Economics.
“Even if he stays on as finance minister, his credibility has taken a
knock and his presence in the cabinet will be of less comfort to investors in
the coming weeks and months,” he said.
MORE/HR/0942
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ITALY-BUDGET-DEBT 2 MILAN
– ‘Historic day’ –
“Today is a historic day! Today Italy changes! For the first time the
state is on the people’s side. For the first time it is not taking away, but
giving,” Di Maio said in a message on Facebook.
He had previously threatened to vote against the budget unless funds were
found for projects promised in March elections, including the movement’s
flagship pledge for a basic income of 780 euros for the unemployed and those
on low wages.
There were 10 billion euros ($11.5 billion) earmarked for the income in
the budget, which “for the first time in the history of this country will
eradicate poverty”, he said.
Salvini said the budget would lower taxes by 15 percent for over one
million Italian workers and free up around 400,000 jobs for the young by
enabling people to retire earlier.
All would be paid for without imposing a VAT hike on long-suffering
Italians, he said.
Di Maio had repeatedly railed against the EU’s budgetary restrictions,
initially insisting it could do no harm to go over the 3.0-percent threshold
set by Brussels.
“We’ll explain to the markets that there are so many investments we can do
with this 2.4 percent that we’ll be able to make the economy grow as we
wish,” the populist leader said.
Italy’s draft budget must be submitted to the European Commission by
October 15 and “a protracted period of negotiation between Italy and the
Commission seems likely,” Allen said.
– Growth woes –
The big spending may unnerve investors and drive up the spread between the
German and Italian bond yields, which rose above 300 points in May amid
concerns over a eurosceptic government taking power.
The higher the yield, the more expensive it is for the state to borrow
money, reducing its financial margins for manoeuvre.
The situation is made more complicated by a lacklustre growth forecast:
just 1.0 percent in 2019 according to the Bank of Italy and the International
Monetary Fund (IMF), and 1.1 percent according to the European Commission.
BSS/AFP/HR/0945