Italy Stands by Main Pil­lars of Bud­get


ROME (Reuters) - Italy stood by the main pil­lars of its 2019 bud­get on Fri­day, as a dead­line neared for it to change what Brus­sels called overly op­ti­mistic eco­nomic as­sump­tions or face penal­ties for break­ing EU fiscal rules.

Deputy Prime Min­is­ter Luigi Di Maio and Econ­omy Min­is­ter Gio­vanni Tria said they were com­mit­ted to re­spect­ing a max­i­mum bud­get deficit of 2.4 per­cent of eco­nomic out­put next year.

But the Euro­pean Com­mis­sion, which has given Rome un­til Tues­day to present a new bud­get, has fore­cast a deficit of 2.9 per­cent and a struc­tural fiscal gap - ex­clud­ing one-offs and busi­ness cy­cle swings ris­ing to 3.0 per­cent.

Un­der EU re­quire­ments, Italy should cut its struc­tural deficit next year to 1.2 per­cent and con­tinue re­duc­ing it every year un­til it reaches a bal­anced bud­get.

Tria said the govern­ment was “busy draft­ing an an­swer to the Euro­pean Com­mis­sion with re­gards to the most con­tentious points of the bud­get”.

But Rome would con­firm its “main pil­lars”, as an eco­nomic slow­down had made fiscal ex­pan­sion even more nec­es­sary, he told a par­lia­men­tary hear­ing.

The govern­ment says it will in­tro­duce an in­come sup­port pro­gram next year to tackle grow­ing poverty, and re­duce the re­tire­ment age in an ef­fort to free up the la­bor mar­ket and gen­er­ate more job op­por­tu­ni­ties for the young.

It is also promis­ing tax cuts and of­fer­ing a par­tial amnesty for cit­i­zens who set­tle tax dis­putes with the au­thor­i­ties.

The Com­mis­sion re­jected Italy’s 2019 fiscal plan last month, say­ing it flouted a pre­vi­ous com­mit­ment to lower the deficit and that it did not guar­an­tee a re­duc­tion in the coun­try’s debt, the sec­ond high­est in the euro zone as a pro­por­tion of GDP.

In Helsinki, Valdis Dom­brovskis, the Com­mis­sion Vice Pres­i­dent re­spon­si­ble for the euro, on Fri­day reaf­firmed the EU ex­ec­u­tive was con­sid­er­ing start­ing an excessive deficit pro­ce­dure if Italy did not change the bud­get.

He said Brus­sels be­lieved Rome’s fiscal cal­cu­la­tions were “overly op­ti­mistic”.

“Ba­si­cally the as­sump­tion is that if they ... in­crease pub­lic spend­ing, it will stim­u­late the econ­omy and thus will help to re­duce the bud­get deficit. We see that this is ac­tu­ally not ma­te­ri­al­iz­ing,” he said.

The stand­off be­tween Rome and Brus­sels has spooked fi­nan­cial mar­kets and, af­ter Tria spoke, 10-year Ital­ian bond yields climbed to 3.46 per­cent IT10YT=RJR, their high­est in over a week.

That pushed the closely-watched gap over safer Ger­man Bund yields back above 300 ba­sis points.

Italy’s cen­tral bank warned that the rise in bor­row­ing costs over re­cent months risked im­pact­ing the econ­omy and can­celling out the ex­pan­sion­ary ef­fects of the bud­get.

“I hope for a so­lu­tion that com­bines both Italy’s re­spect for the rules it must abide with as a mem­ber of the mon­e­tary union... and the govern­ment and par­lia­ment pur­su­ing their po­lit­i­cal goals,” Luigi Fed­erico Sig­norini, the Bank of Italy’s deputy di­rec­tor gen­eral, told a par­lia­men­tary com­mit­tee.

Di Maio, whose anti-es­tab­lish­ment 5-Star Move­ment gov­erns in a coali­tion with the far-right League, said he be­lieved mar­ket pressure would ease when in­vestors re­alised the govern­ment was com­mit­ted to hold­ing the deficit in­side its 2.4 per­cent tar­get.

But he gave no in­di­ca­tion that the govern­ment was will­ing to change the 2019 bud­get draft.

Asked if Italy would pay any fines the EU might levy, Di Maio told re­porters in Rome “pacts must be hon­oured”, but that he did not ex­pect any charges to be levied and was con­fi­dent an agree­ment with Brus­sels would be reached.

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