November 26, 2018 / 7:47 AM / 13 days ago

Italy sticks to 2019 budget goals, for now, ahead of cost review

ROME (Reuters) - The Italian government said on Monday it was sticking to its main 2019 budget goals for now as it awaits a cost analysis of its main spending measures, but left open the possibility of eventually cutting its deficit target.

FILE PHOTO: Italy's Minister of Labor and Industry Luigi Di Maio, Prime Minister Giuseppe Conte and Interior Minister Matteo Salvini leave at the end of a news conference after a cabinet meeting at Chigi Palace in Rome, Italy, October 20 2018. REUTERS/Remo Casilli

Prime Minister Giuseppe Conte discussed the contested financial package with his two deputies, Matteo Salvini and Luigi Di Maio, against the backdrop of possible disciplinary action from Brussels unless the expansionary plans are altered.

“The objectives that have already been fixed are confirmed,” the three men said in a joint statement.

“As far as the on-going discussions with European institutions are concerned, we agreed to wait for the technical analysis of the proposed reforms which have the most important social impact to quantify precisely the cost,” they added.

They said any additional funds that might emerge from the cost review would be used primarily to boost investments. However, two government sources said the possibility of lowering the 2019 deficit target remained on the table.

Earlier on Monday, two sources had told Reuters the coalition may reduce next year’s deficit goal to as low as 2 percent of gross domestic product from the 2.4 percent currently projected in order to avoid disciplinary action from Brussels.

The European Commission took a first step last week to disciplining Italy over the budget after Rome refused to change it, raising the stakes in a dispute that has alarmed the whole euro zone and could eventually lead to fines.

Hopes that Italy was poised to curb its spending plans set off a rally in financial markets.

Italy’s benchmark bond-yield spread over the German equivalent fell to its tightest level in more than a month at some 279 basis points, while the Milan stock market rose more than 2 percent.

COST CONSIDERATIONS

Since presenting the draft budget two months ago, Italy’s two coalition parties, the right-wing League and the anti-establishment 5-Star Movement, had repeatedly refused to budge on their spending program.

However, League leader Salvini and 5-Star chief Di Maio both appeared to soften their tone ahead of their meeting with prime minister Conte.

Salvini said on Sunday that “no one is stuck” to the 2.4 percent target. Di Maio said on Monday that as long as the main measures in the budget remain unchanged then lowering the deficit goal was not a problem.

The Treasury has not yet fully estimated the cost or finalised plans for the government’s flagship projects — including bringing forward the retirement age and introducing an income support plan for the nation’s army of poor and unemployed.

A government source said these two schemes might end up costing less than initially forecast, giving the government potential wriggle room on the deficit.

A parliamentary source said the coalition was considering delaying the implementation of the so-called citizen’s income and the introduction of the lower retirement age to April instead of February or March, which could save billions.

The Bank of Italy said on Friday that rising yields on Italian government bonds were hurting private wealth and undermining the financial sector, making it more expensive for companies to borrow.

On Monday, the European Central Bank’s chief economist, Peter Praet, said increasing borrowing costs would offset any of the possible economic advantages to hiking spending in breach of EU rules next year.

Reporting by Giuseppe Fonte, additional reporting by Giancarlo Navach in Milan and Balazs Koranyi in Frankfurt, Writing by Steve Scherer and Crispian Balmer; Editing by Agnieszka Flak, Matthew Mpoke Bigg and Lisa Shumaker

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