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ROME – The Italian anti-establishment government has significantly expanded its budget deficit target for next year to fund its election promises, which may put the focus on the European Union.
The government, backed by the 5-star populist movement and the anti-immigrant parties of the League, has targeted a budget deficit of 2.4% of gross domestic product for next year, triple what the previous government had planned.
The decision caps months of uncertainty over whether the government will maintain its opposition to the EU's demands that Italy control its debt, which Rome sees as limiting the country's growth potential. The government would prefer to increase spending to stimulate economic growth.
Both sides had pressed the Minister of Economy, Giovanni Tria, who had advocated a deficit target of 1.6%, to yield to their demands.
Mr Tria saw a 1.6% deficit as a sure limit for keeping Italy's debt, the second largest in Europe as a percentage of GDP after Greece, on a downward trajectory.
Since the government took office at the beginning of June, repeated calls by some officials to be more lax about deficit – or even exceed the European limit of 3% – to pay for the costly measures promised by both parties officials. This has increased the cost of servicing the country's debt.
Investors sold Italian assets throughout Thursday, although losses eased during the day.
The benchmark FTSE MIB had the worst performance among the major European markets, losing 0.6%. Italian bonds were sold, with yields on the country's 10-year note up 8 basis points to 2.91%.
"We are going to implement historic measures," said Deputy Prime Minister and 5-star leader Luigi Di Maio. "We will explain to the markets that there is so much investment in this 2.4% that we can grow the economy as much as we want it."
The new deficit target and the policies set by government officials in the budget showed how Tria yielded to both parties, who wanted to show voters that they were serious about their election commitments. The Ministry of Economy did not comment immediately.
This is particularly true for 5 Star, which is concerned that its flagship proposal, a universal basic income for the poor, could be reduced or excluded from next year's budget.
Wednesday, Di Maio warned that his party would not vote in favor of budget targets if they did not include this measure or other commitments of their campaign.
The two parties supporting the government operated on different platforms, then joined a coalition program that openly challenged the rules of the euro area.
This platform contained very expensive measures – including tax cuts and a lower retirement age – whose total price could reach 100 billion euros (117.4 billion dollars), according to some economists.
On the other hand, the League, which has seen its support almost double since the March elections, while 5 Star has lost support, has recently taken a more pragmatic stance, saying the government will need a lot of time to keep all its promises.
On Thursday, officials from both sides outlined some of the fiscal measures that underlie the deficit target.
These include lowering the retirement age by partially repealing a pension revision introduced at the end of 2011 at the height of the financial crisis, while canceling an expected increase in sales tax. . The budget will also reduce some taxes and allocate 10 billion euros to universal basic income, officials said.
The full budget will be unveiled in October and will be considered by the European Commission, which may reject it. The Italian parliament will have until the end of the year to approve it.
Write to Giovanni Legorano at [email protected]
