Italy supports growth and revised budget for deficit projects and sets the stage for the EU's confrontation

BRUSSELS (Reuters) – Italy has submitted to the European Commission its draft budget for next year, with the same assumptions of growth and deficit that a project rejected last month for violation of rules of the European Union, but with a falling debt, says the new project.

The expected debt reduction, which Italy wants to achieve using funds equivalent to 1% of GDP from privatization, addresses one of the Commission's main concerns regarding the previous project: debt public would not fall as required by the rules of the EU.

But the revised budget still plans to increase its structural deficit, which excludes impasses and cyclical fluctuations, from 0.8% of GDP next year, instead of reducing it by 0.6% of GDP. GDP, as required by the EU rules.

This, added to what the Commission considers as unrealistic assumptions about growth, still places Rome on the same path as the Commission, which has to deliver an opinion on the revised draft on 21 November.

"While strengthening its privatization plan and committing to mitigate spending overruns, the Italian government has not changed its deficit targets. This will likely lead the European Commission to recommend an infringement procedure, "said Morgan Stanley economist, Daniele Antonucci.

EU fiscal rules require highly indebted governments, such as Italy, to reduce their structural deficit and debt each year.

The European Commission, which enforces the rules, had the opportunity to take disciplinary action against Rome for not having sufficiently reduced its debt in the previous project.

But now, Rome now sees its public debt fall to 129.2% of GDP in 2019, 127.3% in 2020 and 126.0% in 2021 out of the 130.9% expected by Rome this year.

The Commission predicted last week that Italy's debt would reach 131.1% of GDP this year and was unlikely to change that level before 2020.

OPTIMIZED GROWTH ASSUMPTIONS

Italy has maintained its economic growth assumptions of 1.5% in 2019, 1.6% in 2020 and 1.4% in 2021, although the Commission expects Italian growth of 1.2% in Next year and the International Monetary Fund is even less optimistic with a forecast of 1.0%. Market economists are also skeptical.

"We are more bearish than expected by the government," Morgan Stanley's Antonucci said.

Italy's overall deficit target for next year remains 2.4%, up from 1.8% this year, in order to fund election promises of higher spending and more tax reduction.

The Commission believes, however, that slower than expected growth as well as higher debt service costs will bring the gap to 2.9% in 2019 and 3.1% in 2020.

"We expect a larger deficit of about 2.5% of GDP over the next three years, as well as lower growth. The public debt should not be reduced in 2019-2021, in our opinion, "Antonucci said. "The fiscal stimulus for growth will probably have beneficial effects on consumption. But it is unlikely to be large enough to lead to an improvement in public finances. "