Bank of Italy warns coalition government against increased spending

The Bank of Italy has warned the anti-establishment government of Rome against the widening of the country's deficit.

The central bank warning comes at a time when tensions between the Italian government and the European Commission, which oversees fiscal policy in the EU, are exacerbated. Earlier this week, Brussels sent a letter to Italy, asking the government to explain why the country's debt had not declined in 2018.

"Simply looking for a temporary solution by increasing the public deficit could be inefficient, if not counterproductive, if it resulted in a deterioration in the financial situation and in the confidence of households and businesses," the statement said. Bank of Italy in its annual report Friday.

The central bank added that the risks of higher spending "should not be underestimated".

The current coalition government, in power for about a year, has pledged to increase spending to revive the Italian economy. As a result, he has put forward initiatives such as the income of citizens (which aims to help the poor) and plans to reduce the retirement age.

Such spending plans have attracted a lot of attention in Brussels, with Italy being the second most indebted country in the European Union. The European Commission has warned Rome since last autumn that it should reduce its deficit target for 2019 in order to reduce its debt. They both agreed to reduce the government's initial deficit target from 2.4% to 2.04% by the end of 2018. However, the Italian government had to revise this target upwards sooner this year.

The Bank of Italy also said that high debt levels in Italy continued to be a "serious constraint".

"Compared to the rest of the eurozone, the cost of Italy's public debt is higher and its economic growth lower," the central bank said in its report.

According to data from the European Commission released earlier this month, Italy's debt would reach 133.7% of GDP this year and rise to 135.2% by 2020.

The government's plans and its fight against EU spending have caused some volatility in the bond market, leading to higher yields. The Bank of Italy warned Friday that these bond market movements "limit growth prospects".