Italy sticks to big spending budget plans despite EU pressure

Italy's populist coalition government has defied calls from the European Commission to reverse its plans to sharply increase public spending as part of a gamble to stimulate the country's stagnant economy, setting the stage for Brussels to hit Rome with financial sanctions.

In a letter accompanying a revised budget plan sent to the commission, Giovanni Tria, Italy’s economy minister, confirmed that his government would stick to deficit targets that were rejected by Brussels last month as an “unprecedented” breach of its spending rules.

Mr Tria said that while Rome recognised its budget did not meet EU spending rules it was pressing ahead with “a difficult but necessary decision because our [gross domestic product] remains well below pre-crisis levels and the most disadvantaged sectors of Italian society are experiencing dramatic economic conditions”.

In tweaks to part of its plans, Rome said it would dedicate 0.2 per cent of gross domestic product for spending on public infrastructure. Mr Tria said he wanted Brussels to exempt the spending from the EU’s exceptional expenditure rules – a request that Brussels has said will be rejected.

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Debt burden

The government also revised up its estimates for money made from privatisations of national assets to 1 per cent of GDP next year – cash that it said would help reduce its debt burden to 126 per cent of GDP by 2021.

But commission officials warned that the cosmetic changes would not be enough to stop a sanctions procedure from being activated as early as next Wednesday. Brussels has a week to analyse the revised budget and is expected to produce a report endorsing the start of an “excessive deficit procedure” on November 21st, said one senior official. It will need to be endorsed by EU governments within two weeks.

The government, formed in June from a coalition of the anti-establishment Five Star Movement and the anti-migration League, had faced a deadline from Brussels to resubmit its budget plans, which will see an increase in welfare spending, a reduction in Italy’s retirement age and the lowering of certain taxes.

The excessive deficit procedure could see Italy issued with fines of up to 0.5 per cent of GDP. It would be the first imposition by Brussels of a financial penalty on a member state for breaking its budget limits.

Although the commission is in charge of disciplining Italy, other eurozone capitals have backed Brussels in escalating its demands. Wopke Hoekstra, Dutch finance minister, said he was “deeply worried” by Italy’s failure to revise its deficit targets.

“Italy’s public finances are off balance and the plans of the Italian government won’t lead to robust economic growth,” said Mr Hoekstra.

In his letter, the Italian economy minister defended the government’s choice to embark on a path of higher state spending to kick-start economic growth, and defended its forecasts of 1.5 per cent growth for next year following estimates from the commission and the IMF that are significantly lower.

Confrontation

Financial markets have taken fright at the confrontation between Rome and Brussels over the budget, with investors in Italian government bonds pushing the spread the country pays to borrow over 10 years compared with Germany to a five-year high.

In his letter, Mr Tria said Rome was confident that “the rise in bond yields will be reversed once investors are fully cognisant of all the details of the measures envisaged in the budget”, and that it would “continue a constructive dialogue” with the commission over its plans.

Rome and Brussels disagree on the impact Italy’s spending plans will have on its public finances. Although Mr Tria is maintaining a target of 2.4 per cent of GDP for 2019, the commission has calculated it at 2.9 per cent. Brussels also forecasts Italy’s debt to remain unchanged at 131 per cent of GDP until 2020, where Rome is pencilling in 126 per cent by 2021.

The IMF has also warned that Italy’s plans to boost economic growth through more public spending are at risk of being completely offset by higher borrowing costs.

The IMF said Italy’s GDP would grow by just 1 per cent next year, far less than the 1.5 per cent growth foreseen in Rome’s budget, resulting in the country’s budget deficit as a percentage of GDP for 2019 coming in at 2.66 per cent of output, higher than the 2.4 per cent target.

– Copyright The Financial Times Limited 2018