Italian Data Revision Gives Tria Final View for Populist Budget

(Bloomberg) -- Italian economic growth and deficit data for 2017 were revised up, giving Finance Minister Giovanni Tria the final pieces of data to decide whether he can afford to start tax cuts and provide a basic income promised by the populist government.

The estimate for growth last year was raised to 1.6 percent from 1.5 percent previously, lowering the debt ratio to 131.2 percent from 131.8 percent, Istat, the statistics agency in Rome, said on Friday. Still, last year’s deficit was revised up to 2.4 percent from 2.3 percent previously due to lower tax revenue and higher spending.

Italy’s 10-year government bond yield fell 4 basis points to 2.84 percent as of 10:19 a.m. in Rome.

Italian Data Revision Gives Tria Final View for Populist Budget

Tria has been hounded by coalition leaders demanding money for pet projects, and the revised numbers could force him and his lieutenants to adjust next year’s budget targets accordingly.

Speaking on Thursday to lawmakers in Rome, the finance minister reiterated that the government’s program will be gradually implemented and compatible with balancing public finances. The 2019 budget will start introducing some of the measures the ruling parties agreed upon, he said.

Tria and key cabinet ministers held a meeting on Friday to discuss the 2019 budget, one of the government officials attending the talks said, declining to be named in line with internal policy.

Time is short. The government needs to set the new public finance and economic growth targets by Sept. 27, with a draft budget due for inspection by the European Commission in Brussels by mid-October.

Coalition partners the Five Star Movement and the League have sufficient majorities in both houses of Parliament to make budget approval by year’s end a near-certainty.

Tria, who belongs to neither party, is steadfastly holding the line at a 1.6 percent deficit-to-gross domestic product ratio for 2019, La Stampa reported this week. Five Star leader Luigi Di Maio and League leader Matteo Salvini have been pressuring Tria to widen the gap to fund their programs.

Tax Loopholes

Spending cuts and closing some tax loopholes alone would be insufficient to keep the populists’ plans on track, almost everyone agrees. And a government that’s promised change can’t accept the notion of the status quo.

Prime Minister Giuseppe Conte, answering reporters’ questions on Wednesday, declined to state his preferred deficit number, saying only that the budget must be “credible” to attract investors. Cabinet Undersecretary Giancarlo Giorgetti, a leading member of the League, said the party still favors the possibility of pushing the gap higher than 2 percent.

Growth slowed in the first half of this year and Tria himself has said output won’t increase at the same pace as 2017. That complicates the coalition’s struggle to implement its program while trying to avoid a sales tax increase planned by previous governments.

The League’s proposals for 2019 include changing the retirement age and cutting tax for small companies, the party said in a statement following a leadership meeting on Thursday. Salvini, cabinet ministers and his economic advisers excluded “any hypothesis of an increase in the sales tax.”

The European Union has repeatedly said Italy must keep its deficit well below the standard 3 percent ceiling, while making extra efforts to cut its mountainous debt load.

Italian Data Revision Gives Tria Final View for Populist Budget

Italy has been racking up primary surpluses, or the positive balance between revenue and outlays without taking account of the money needed to pay off a national debt that’s hit 2.34 trillion euros ($2.75 trillion). The country has the second-highest debt-to-GDP ratio in the euro region after Greece.

Interest payments on those obligations have constantly pushed Italy into annual budget deficits, leading to hand-wringing and stern lectures from EU bureaucrats in Brussels.

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