Deficit tussle shows growing populist power

Italian budget plans to spend, and spend big, are in defiance of EU regulations, writes John Follain

ITALY’S establishment has been dealt a body blow by the populist duo of Luigi Di Maio and Matteo Salvini, who have won their first battle to fund costly campaign promises.

After long and tense negotiations which threatened the job of Finance Minister Giovanni Tria, deputy premiers Di Maio and Salvini announced triumphantly the government had agreed to set next year’s deficit target at 2.4pc of gross domestic product.

That’s over the 2pc threshold which emerged as a litmus test for financial markets worried pressure to deliver on election promises would jeopardise state finances and breach EU limits.

The target is a blow to Tria and President Sergio Mattarella, who had sought to moderate the more extreme instincts of the government, formed by Di Maio’s anti-establishment 5-Star Movement and Salvini’s anti-migrant League. “This is a defeat for Tria,” said Erik Jones, professor of international political economy at Johns Hopkins University in Bologna. “Debt is going to grow relative to GDP, and the government’s going to be under pressure as it drafts the budget.”

The fiscal targets set a framework for a draft 2019 budget the government has to present to the European Commission by mid-October for approval. 5-Star and the League want to deliver on expensive campaign promises to shore up support ahead of European elections in May.

That ballot will reveal just how powerful Euro-sceptic forces have become as right-wing parties across the region step up their attacks on ruling elites, press for greater national sovereignty and seek stricter limits on migration.

“Mamma mia,” exclaimed a European Union official stunned by the deficit figure. The official, who spoke on condition of anonymity, said the headline deficit should have been around 1.6pc to ensure a marginal improvement in the structural balance. The 2.4pc figure puts squarely Italy in breach of its obligations, the official said.

Tria has been locked in a tussle, especially with Di Maio, who said this week a budget deficit above 2pc “isn’t a taboo,” and that the government needs to spend lavishly to boost growth.

Di Maio and Salvini said measures included a basic income for the poor, tax cuts and rolling back a pension reform which had raised the retirement age. Di Maio hailed “a budget for the people, which for the first time in the history of this country cancels poverty thanks to the citizen’s income” at a cost he put at €10bn.

Salvini has taken a more discreet stand in public, but in ministerial meetings he has also pushed for a wider deficit, according to a government official close to the League.

Tria, Mattarella, Prime Minister Giuseppe Conte and Foreign Minister Enzo Moavero Milanesi have formed a quiet alliance based on their shared commitment to the EU and its budget rules, according to senior officials.

Di Maio has suffered more from the growing tensions in the coalition than Salvini, who has won backing for his party with his hard line on immigration. Support for the League has risen to 32pc, while 5-Star has declined to 28.7pc, according to a poll published this week. In March’s general election, the League got 17.4pc of the vote and Five Star 32.7pc.

“Attention will now turn to the details and assumptions of the budget to determine whether they are attainable or not,” said Mohammed Kazmi, portfolio manager at Union Bancaire Privee.

5-Star adopted a defiant stand moments after the deficit target was agreed. “We don’t fear the spread” — a reference to the gap between Italian and German 10-year bonds — “we don’t fear the markets,” said Stefano Patuanelli, head of 5-Star senators. “At last the government is answering the demands of citizens.”