September 27, 2018 / 9:22 AM / in 25 days

Italy hikes deficit, defying EU, as economy minister caves in

ROME (Reuters) - Italy’s government on Thursday targeted the budget deficit at 2.4 percent of gross domestic product for the next three years, defying Brussels and marking a victory for party chiefs over economy minister Giovanni Tria, an unaffiliated technocrat.

Tria had initially wanted a deficit set as low as 1.6 percent next year, hoping to respect European Union demands that Italy progressively cut the fiscal gap to rein in its high debt.

The coalition government of the 5-Star Movement and the League, which took power in June, had been pushing for a deficit around 2.4 percent of GDP to fund costly policy pledges, while Tria had been slowly shifting his position but trying to hold out for something below 2.0 percent.

“There is an accord within the whole government for 2.4 percent, we are satisfied, this is a budget for change,” 5-Star leader Luigi Di Maio and League chief Matteo Salvini said in a joint statement after meetings with Tria.

The statement appeared to refer only to the 2019 deficit target, but government officials and Justice Minister Alfonso Bonafede later said the same deficit level would be maintained for three straight years to 2021.

The policy marks a striking shift from the previous centre-left administration, which had targeted a deficit of 0.8 percent of GDP in 2019 and a balanced budget in 2020.

Italian asset prices may come under pressure on Friday, as financial markets had expected Tria to resist the spending push from Salvini and Di Maio, who are both deputy prime ministers.

“Until today markets had been betting on Tria’s capacity to rein in political forces. That assumption is now crumbling,” said Francesco Galietti, head of Rome-based political risk consultancy Policy Sonar.

Tria did not immediately comment, but Di Maio and other government officials said he had no intention of resigning.

“From now on things will be tough for Italy,” said Armando Marozzi, analyst at Medley Global Advisors. “The European Commission will reject this budget and next month ratings agencies are likely to downgrade Italian bonds.”

A meeting of the full cabinet to sign off on the government’s economic and financial targets for the next three years ended at around 11 p.m. (2100 GMT) with no news on targets for economic growth or the public debt.

Prime Minister Giuseppe Conte said on Facebook that the budget goals were “considered, reasonable and courageous” and would “ensure more robust economic growth and significant social progress for our country.”

He said the budget plan included “the biggest programme of public investments ever carried out in Italy.”

The ruling coalition had been pushing Tria, an academic not affiliated to either party, to ramp up the fiscal deficit to finance their promises of tax cuts and higher welfare spending.

Some coalition voices had publicly told the minister he should quit if he could not back their spending plans.

The coalition parties say the priority must be financing policies including a basic income for the poor and a reduction in the minimum retirement age, rather than meeting deficit goals previously agreed with Brussels.

A 2.4 percent deficit target remains inside the 3.0 percent ceiling prescribed by EU rules, but Italy had promised Brussels it would cut the deficit decisively to curb its mammoth debt.

“HISTORIC DAY”

“Today is a historic day, today Italy has changed,” Di Maio posted on Facebook after the deficit goals were announced, as 5-Star lawmakers and supporters gathered outside parliament waving the movement’s flags.

Di Maio said the 2019 budget, which must be presented by Oct. 20, will set aside 10 billion euros ($11.6 billion) for 5-Star’s flagship policy of a “citizens’ income” of up to 780 euros per month for 6.5 million poor Italians.

Salvini said the budget would also allow people to retire earlier, freeing up about 400,000 jobs for the young, and cut tax rates for a million self-employed workers.

He called the expansionary fiscal plan “a revolution of common sense,” and said it would allow increased investment in “schools, families, roads, and local government.”

5-Star, which has been overtaken by the League in opinion polls, was particularly keen to present the budget as a political victory. Its ministers gathered on the balcony of the prime minister’s residence in central Rome, waving to party supporters in the square below.

Financial markets have been nervous since the government took office due to fears its spending plans will boost Italy’s debt, which is already the highest in the euro zone after Greece’s as a proportion of GDP, at around 131 percent.

The League and 5-Star, rivals ahead of an inconclusive election in March, say they will govern together for a full five-year term and phase in most of their policies gradually.

($1 = 0.8595 euros)

A man arrives at the stock exchange in downtown Milan September 13, 2012. REUTERS/Paolo Bona/Files

Additional reporting by Gavin Jones, writing by Gavin Jones and Steve Scherer, Editing by William Maclean and Rosalba O'Brien

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