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December, 2018 4:57 AM



Italy's populists in first EU budget test

Italy's populists in first EU budget test

Italy's populist government is set to unveil the outlines of its first budget Thursday, amid fears it could breach EU fiscal rules and worsen the country's already mammoth debt burden.

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27.09.2018 05:02 PM

Italy's populist government is set to unveil the outlines of its first budget Thursday, amid fears it could breach EU fiscal rules and worsen the country's already mammoth debt burden.

All eyes will be on Western Europe's first anti-establishment leadership to see whether it will defy Brussels -- potentially sparking panic on the financial markets -- or tow the line.

The coalition, expected to present a revised budget for 2018 and its plans for 2019, has been struggling to find a way to both uphold its electoral promises and reassure investors worried about the health of the eurozone's third largest economy.

It all revolves around one key figure: the ratio of public deficit to gross domestic product (GDP).

A parliamentary source close to the government on Tuesday said it was likely to come in at somewhere between 1.8 percent and 1.9 percent of GDP in 2019, compared to the 0.8 percent forecast by the previous centre-left government.

Italy's public debt currently stands at 132 percent of GDP, the biggest in the eurozone after Greece.

Intense negotiations have been under way between the coalition parties -- the anti-establishment Five Star Movement (M5S) and far-right League -- and Economy Minister Giovanni Tria, an independent who is believed to have set an upper limit of 1.6 percent.

The cabinet will meet at 1600 GMT on Thursday, suggesting the talks will go on into the night.

'Courageous'

Five Star leader and deputy prime minister Luigi Di Maio has repeatedly railed against the EU's budgetary restrictions.

He initially insisted it could do no harm to go over the 3.0 percent threshold set by Brussels.

On Monday, Di Maio said if Paris could play fast and loose, so could Rome: he pointed to France's public sector deficit, expected to rise to 2.8 percent of GDP next year. Was Italy not "a sovereign country just like France" he asked?

By Wednesday the head of the populists said his movement would not vote for the budget if it was not "courageous" enough.

A "serious minister" would find a way to produce the funds, he said in a swipe at Tria.

An audio message in which the prime minister's chief spokesman threatened to "eliminate a tide" of treasury officials unless they find the money for projects, including a basic income grant promised in March elections, had already caused a political storm.

The message leaked to the media promised a "mega-vendetta" if the cash was not forthcoming for the series of costly pledges made in the joint government programme.

The Five Star's key promise is a basic income of 780 euros ($919) for the unemployed and those living on low wages, but the price tag -- 10 billion euros ($11.7 billion) at its most modest estimate -- would weigh heavily on the public purse.

Hours after Di Maio threatened not to back the budget, Tria said that the basic minimum income would indeed be provided for, "to help manage the social consequences of a changing world".

The League wants to introduce a "flat tax" of 15 to 20 percent for companies and individuals, which is estimated would reduce tax revenues by 80 billion euros per year.

Growth woes

Such big spending may unnerve investors and drive up the spread between the German and Italian bond yields, which rose above 300 points in May amid concerns over a eurosceptic government taking power.

The greater the spread, the more expensive it becomes for the state to borrow money, reducing its financial margins for manoeuvre.

The situation is made more complicated by a lacklustre growth forecast: just 1.0 percent in 2019 according to the Bank of Italy and the International Monetary Fund (IMF), and 1.1 percent according to the European Commission.

"Most of the League and Five Star Movement's electoral promises are unlikely to be kept in their coalition government's first budget," said Nicola Nobile, an Oxford Economics expert.

"The government must find 13 billion euros to halt an automatic increase in VAT," which both coalition parties oppose, he said.

The party with the most to lose is the M5S, which polls show would currently pocket between 28 percent and 29 percent of voter intentions, down from the 32 percent of votes it won at the election in March.

The League, boosted by the anti-immigrant rhetoric of its leader Matteo Salvini, is on an upswing, leapfrogging the Five Star Movement to become the most popular party, bagging about 32 percent of potential voters compared to 17 percent in March.
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