October 4, 2018 / 10:23 AM / 11 days ago

Italy dismisses concern the EU will reject its budget plan

ROME (Reuters) - The Italian government on Thursday dismissed concerns that the European Commission would reject its plan to raise deficit spending next year and signaled that it would not backtrack, even under market pressure.

FILE PHOTO: Italian Economy Minister Giovanni Tria attends as Prime Minister Giuseppe Conte (unseen) speaks during his first session at the Lower House of the Parliament in Rome, Italy, June 6, 2018. REUTERS/Tony Gentile/File Photo

After a selloff hit Italian bonds on Tuesday, the government made up of the anti-establishment 5-Star Movement and the right-wing League on Wednesday watered down its original plan to keep its deficit steady at 2.4 percent of gross domestic product (GDP) in 2020-21.

But it stuck to its 2.4 percent target for next year, and on Thursday government officials said they had no plans to make further revisions to that goal, which is three times more than one set out by the previous government.

Speaking about the multi-year budget targets that must be reviewed by Brussels by mid-month, Deputy Economy Minister Massimo Garavaglia said on Thursday: “(Either) it passes or it doesn’t, but this isn’t the problem. We’re more focused on what is happening in the markets.”

Garavaglia also said the government’s GDP growth forecast for next year would be 1.6 percent, much higher than the 1.2 percent median projection of 51 analysts polled by Reuters last month.

Economy Minister Giovanni Tria later said in a letter to the European Commission that the growth forecasts had actually been set at 1.5 percent in 2019, 1.6 percent in 2020 and 1.4 percent in 2021.

He called for an “open and constructive dialogue” with the Commission over the budget plan.

The gap between Italy’s benchmark 10-year bond yields and their safer German equivalent on Tuesday widened to more than 300 basis points, its widest since May, on concerns about Italy’s plans. On Thursday, the spread had narrowed to 278 basis points.

League leader Matteo Salvini, speaking on RAI state radio, said that next year’s deficit spending was needed to spark growth and create jobs, and added that the government would not back down even if the spread widened to 400 basis points.

“This is a budget that looks to the future, and we will absolutely not go backwards,” Salvini said.

The government’s confident tone came as la Repubblica newspaper reported that the commission had already sent Italian officials an informal note saying it would reject next year’s spending plans.

Sources close to economic commissioners in Brussels said the report was “unfounded”. The commission must formally give its opinion on the budget forecasts by the end of the month.

Separately, deputy prime minister and 5-Star leader Luigi Di Maio denied an article in Il Fatto Quotidiano saying the government was seeking a cabinet reshuffle, mainly to replace Economy Minister Giovanni Tria in December or January.

Di Maio also seemed unfazed by concern expressed earlier this week by commissioners and EU allies over the deficit spending plans.

“We have brought home the people’s budget, and we’re going to forge ahead more determined than before,” Di Maio said in an interview with Radio Radicale. “Now we can start a serious and healthy discussion with the European Commission to reach a positive conclusion.”

(This version of the story has been corrects 2019 GDP forecast to 1.5 percent (not 1.6) in sixth paragraph)

Reporting by Giuseppe Fonte and Steve Scherer; Additional reporting by Gavin Jones, Giselda Vagnoni and Giulia Segreti in Rome and Francesco Guarascio in Brussels; Editing by Hugh Lawson and Angus MacSwan

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