September 22, 2018 / 9:57 AM / a year ago

Bank of Italy head warns of higher deficit spend impact on debt

VARENNA, Italy (Reuters) - Any increase in deficit spending that does not help boost structural economic growth could put Italy’s debt on an unsustainable course, the head of the Bank of Italy said.

FILE PHOTO: Bank of Italy Governor Ignazio Visco speaks in Rome, Oct. 31, 2017. REUTERS/Remo Casilli/File Photo

Speaking at a conference on Saturday, Ignazio Visco said that in light of Italy’s current public finance conditions, any recourse to deficit spending required caution.

“An unproductive increase of the deficit would end up worsening the outlook for public finances, feeding investor doubts and raising the risk premium on state debt,” he said.

Visco spoke as Italy’s populist ruling coalition was preparing its first budget, expected to include tax cuts, higher welfare spending and a reduction in the retirement age.

On Friday Prime Minister Giuseppe Conte met his top ministers to try to resolve an impasse over the budget between the ruling parties and the economy minister who is resisting their plans to boost spending.

The coalition, comprising the anti-establishment 5 Star Movement and the right-wing League, has to set growth, deficit and debt targets for next year’s budget by Sept. 27.

Visco, who started his speech by saying the things he had to say this year were not much different to last year, said increased deficit spending without boosting economic growth potential would only yield temporary benefits.

If budgetary expansion was accompanied by a fall in investor confidence, the impact on interest rates could be particularly marked, he said.

The negative impact of this on economic growth (GDP) could put the debt-GDP ratio on “an unsustainable course”, he said.

Italy has the second highest debt pile in the EU after bailed-out Greece and has to issue around 400 billion euros of state bonds a year to finance it.

The government has previously said it is committed to bringing the debt pile down.

Additional reporting and writing by Stephen Jewkes; Editing by Mark Heinrich

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