Italy’s Conte Eyes New Budget to Test Limits of EU Flexibility

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Prime Minister Giuseppe Conte is set to test the limits of the European Union’s flexibility, with a budget framework for 2020 that falls short on debt reduction targets and fails to reduce Italy’s deficit.

Conte’s government, the second he’s headed, has been currying favor with investors and the European Commission by striking a more pro-European tone than his previous administration and by scaling back the spending promises of League leader Matteo Salvini, who’s now in the opposition.

But Italy’s new budget outlook will require the EU to max out the flexibility it can offer. The outlook document, approved by the cabinet on Monday evening, sets a target for a 2020 deficit at 2.2% of gross domestic product and aims to boost growth to 0.6%, confirming figures previously reported by Bloomberg.

That means the structural deficit -- which strips out one-time effects and is among the figures Brussels monitors most closely -- will worsen by 0.1 percentage point next year, instead of the 0.6 percentage point improvement that Italy had committed to. Debt will rise to 132.5% in 2019 and start declining only slowly in the following years.

”The debt rule would not be satisfied in any of its configurations,” Finance Minister Roberto Gualtieri wrote in the outlook document. “But the reduction in the debt-to-GDP ratio in 2022 compared to the previous year would be significant, at 2.2 percentage points.”

Italy’s Conte Eyes New Budget to Test Limits of EU Flexibility

The outlook is the first step toward next year’s budget, which has to be submitted to the European Commission by mid-October. Final approval must come before year end.

Conte’s coalition, an alliance of former enemies the Five Star Movement and the Democratic Party, wants to avoid a repeat of the clashes with Brussels seen under the previous administration, which twice risked EU disciplinary action over its populist spending promises. The premier is eager to maintain the investor optimism that has brought yields to record lows.

”The new government has given itself the objective of relaunching growth, ensuring at the same time balanced public accounts and proactive participation in the European project,” Gualtieri wrote in the document.

Green New Deal

The budget outlook delivers on Conte’s promise to avoid an automatic sales tax increase worth 23 billion euros ($25 billion) that was due to kick in during 2020. The option of partially raising the levy on some goods had fueled a skirmish within the coalition in previous days.

Italy’s Conte Eyes New Budget to Test Limits of EU Flexibility

The government priorities expressed in the 104-page document also include a “Green New Deal” to counter climate change, boosting public and private investments, reducing labor taxes, countering tax evasion and cutting unemployment.

Among the measures envisioned for 2020, there is:

  • A plan to recover 0.4 percentage point of GDP from reducing tax evasion and boosting electronic payments.
  • About 6 billion euros of savings from lower yields on Italy’s debt.
  • The creation of two funds worth some 50 billion euros to finance investment in green and renewable energy sources.
  • The dismissal of publicly owned assets is no longer a plank of government plans. The previous government had set a target 18 billion euros target for privatizations, while the current administration plans 3.6 billion euros of dismissals in 2020.

©2019 Bloomberg L.P.

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