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Italy Targets Expansionary Budget With Salvini Sidelined for Now

Italy’s Draft Government Plan Pledges Expansionary 2020 Budget

(Bloomberg) -- Italy’s new government would push through an expansionary 2020 budget and demand a review of European Union fiscal rules, according to a draft program seen by Bloomberg.

The 26-point agenda pledges to avert an increase in sales tax that’s due to kick in next year by cutting spending and raising revenue in other areas. Next year’s budget will also cut taxes on labor and introduce a minimum wage, but it won’t jeopardize public finances, according to the draft dated Tuesday.

Premier-designate Giuseppe Conte is drawing up a program with the anti-establishment Five Star Movement and the center-left Democratic Party, as he prepares to report back to President Sergio Mattarella on his attempt to form a new administration as early as Tuesday evening.

Conte is striving to draw a line under a turbulent year in Rome which saw his government plagued by infighting and clashes with the European Commission. Italy may be heading for calmer waters now after Conte thwarted an attempt by right-wing populist Matteo Salvini to seize power by pulling out of the previous coalition last month.

Conte has one more hurdle to clear before he can seal the new alliance. Five Star activists are voting Tuesday on whether to govern with the Democrats, who were one of their biggest political enemies until a few weeks ago. While there is some uncertainty over the outcome of the vote, Five Star activists have tended to endorse the party leadership’s decisions in the past.

The risk for investors is that Salvini could still mount a comeback. The League leader has decried the new coalition as an anti-democratic stitch up. While his support has been dented over the summer, his party still has a clear lead in opinion polls and he is already set on driving a wedge between the partners in the new coalition.

Fiscal Stimulus

For now though, the draft program for the new administration is attempting to lay the foundation for a period of stability.

It pledges to “pursue an expansionary economic policy, without compromising the balance of public finances.’’ Avoiding the sales tax hike in 2020 will require finding savings of about 23 billion euros ($25 billion) from elsewhere in the budget.

The document also promises to seek with the new European Commission “to relaunch investments and reinforce social cohesion, promoting changes necessary to overcome the excessive rigidity of European limits on state budget policies.’’

“There is a need for rules which promote also growth, not just stability,’’ the draft adds.

Dealing With Brussels

Just who would steer Italy’s economy has yet to be decided, according to officials from Five Star and the Democrats who declined to be named discussing confidential negotiations. Options for the post of finance minister include Salvatore Rossi, former director general of the Bank of Italy, Dario Scannapieco, vice-president of the European Investment Bank, and Roberto Gualtieri, a Democrat member of the European Parliament, the officials said.

The draft promises a new tax on internet giants who shift profits out of the countries where they are doing business in order to reduce their liabilities -- a controversial measure introduced by France this year. Other policies include reviewing highway concessions, cutting the number of lawmakers in the Rome parliament as soon as possible and seeking new EU rules on illegal immigration.

The draft makes no mention of an earlier Five Star demand to separate commercial and investment banks.

While a review of EU fiscal rules may happen in coming years with the new commission, imminent changes are unlikely. Simplifying the bloc’s rules, which have often been criticized as too convoluted, will not necessarily give Italy more space for expansionary plans.

Italy’s 2020 budget plan will be closely scrutinized by Brussels, after Italy twice narrowly avoided a disciplinary procedure that could have eventually led to fines. While expansionary plans could be met with apprehension in Brussels, a government with a less confrontational, euroskeptic stance than Salvini’s would likely gain Rome goodwill in budget talks.

--With assistance from Viktoria Dendrinou.

To contact the reporter on this story: John Follain in Rome at jfollain2@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Alessandro Speciale

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