October 18, 2018
Finance

Italys party chiefs win fight over fiscal target

ROME — Italys ruling parties won a battle with the economy minister over the resources needed to finance their costly electoral promises — in a move that will likely annoy Brussels and spook the financial markets.

Late Thursday, the anti-establishment 5Star Movement and the far-right League forced Giovanni Tria, a technocrat, to agree on a 2019 deficit at 2.4 percent of GDP, far higher than the 1.6 percent that the economy minister had wanted.

The Cabinet, including Tria, signed off on the document that sets the framework for the 2019 budget law, which has to be presented to Brussels by October 15 and to the parliament in Rome by October 20 before being approved by year-end.

“Today Italy has changed, we have drafted a budget for the people,” 5Star leader Luigi Di Maio said after the Cabinet meeting, as supporters and MPs surrounded him, waving flags in front of the government building. “This 2.4 percent is a victory for Italian citizens. This budget will allow the economy to grow and investments to rise again.”

The 2.4 percent figure is well below the 3 percent EU-required ceiling. However, it could be high enough to fuel European Commission worries that Italys populist government will slow down or even reverse the path of debt reduction.

Financial markets have been nervous since the government took office in June over fears that its spending plans will increase Italys debt, which stands at around 131 percent of national output and is the highest in the eurozone after Greece.

A large budget was needed to implement the ruling parties flagship policies, including a basic income for job-seekers, a minimum pension of €780 a month, and an income tax cut for around 1 million workers. Di Maio said €10 billion will be devoted to the universal basic income plan, which his party had put at the top of its agenda. Details on the budget plans were still being hammered out, he added.

The 5Stars and Leagues campaign pledges, if carried out, would cost Italy an extra €20 billion. In contrast, the 1.6 percent deficit figure proposed by Tria would have kept public finances under control and translated into €12 billion of available funding for the governments policies.

Tria had tried to keep the markets happy and avoid a clash with European authorities. But he was weakened by attacks from the coalition party leaders, culminating in a leaked audio of the prime ministers spokesman threatening to fire Treasury officials if they arent able to find the resources needed for the budget.

Yet by agreeing to the demands of the ruling parties, Trias position is now even weaker.

“Surrendering to the parties requests, Tria has lost some credibility in the eyes of investors,” said Wolfango Piccoli, head of consulting firm Teneo Intelligence. “But the real, alarming signal for the markets would be his resignation. That would create a real problem for the government, just a few weeks ahead of the budget deadline.”

A spokeswoman for the economy minister said late on Thursday that “hes remaining in his post.”

Some economists, however, reckon the governments defiant move on the budget deficit wont be enough to spark a real conflict with Brussels.

“For sure, the Commission will have to raise its voice,” said Riccardo Puglisi, associate professor of economics at the University of Pavia. “But the critical threshold would have been above 2.5 percent. Today Id say it was a guerrilla action, rather than a war.”

Original Article