Italy Will Need Faster Growth to Lower Deficit, League Says

(Bloomberg) -- The Italian government is likely to lower its deficit in 2020 and 2021 only if the economy grows faster, according to senior government official Armando Siri.

Italian officials are still trying to thrash out the final details of a long-awaited fiscal framework that has roiled markets over the past week. Italian bonds rallied for the first time in five days on Wednesday following reports that the administration will target lower deficits from 2020 in a concession to European Union budget rules.

Siri, economic adviser to Matteo Salvini, leader of the anti-migrant League, and a participant in talks on budget and growth targets, said the administration is considering lowering deficit-to-GDP projections in light of growth forecasts.

“If we decide to insert a growth forecast that is higher than expected then clearly we can decrease the deficit going forward,” Siri, 47, undersecretary at the Ministry for Infrastructure and Transport, said in an interview with Bloomberg at his Rome office. In 2020, "if growth rises, and we’re working to favor this growth, then the deficit level can go lower.”

The Five Star Movement-League coalition, which is under pressure from the European Commission, still needs to release its fiscal outline including growth projections before presenting a draft 2019 budget to the European Commission by Oct. 15.

Siri said the plan will be sent to parliament by Thursday at the latest.

“I’m not in favor of a conservative policy on the deficit because the deficit is linked to other factors," he said. "If you link it to growth it can make sense.”

Concessions to EU

Newspaper Corriere della Sera reported earlier Wednesday that the government will seek to contain the shortfall at 2.2 percent in 2020, and 2 percent in 2021, reviving Italian assets. The FTSE MIB Index of shares headed for the biggest gain in more than a week.

Last week’s initial 2.4 percent deficit targets for 2019, 2020 and 2021 had hit markets. Siri said the deficit targets for the latter years won’t come in any higher than that, but they could come in lower.

“The only thing set in stone is Moses’s 10 Commandments,” he said.

Boosting Growth

The government wants to include in the budget a 15 percent flat tax for professionals and small businesses earning up to 65,000 euros ($75,000), cuts in fuel taxes, a start to implementing a “citizen’s income” for the poor, and lowering the retirement age, Siri said.

“We have to decide which cure we want to administer, a painkiller that only hides symptoms and gives temporary relief, or an antibiotic that can cure the illness.”

Growth will come from tax cuts, and getting people to retire so companies can hire new people. “Austerity has failed miserably, to cure the disease we need to promote growth,” Siri said. “We want to lower the debt but we know it can only go lower with growth”

The median estimate in Bloomberg’s latest survey is for an economic expansion of 1.2 percent this year, and 1.1 percent next year. The European Union has predicted that Italy will have the slowest growth pace in the euro area this year and in 2019.

Carlo Cottarelli, economist and former IMF executive, told Corriere that it will be “really difficult” to reach the government’s reported goal of 1.6 percent growth next year. He pointed to the current quarterly expansion level of 0.2 percent, in the interview published on Monday.

Siri denied that tensions within the coalition were behind the delay in sending the fiscal plan to parliament, with deficit targets first agreed upon on Sept. 27.

“It’s not that we think differently, the reason is that it’s not easy to pass a budget with such small margins,” Siri said.

European Elections

Asked whether he was concerned at the European Commission’s future verdict on the budget, Siri replied: “We are very optimistic about the European Parliament elections in May, because I think the balance of power in Europe will change.”

Italian media have reported that Finance Minister Giovanni Tria threatened to resign over the fiscal plan.

“I’ve never heard that Tria was planning to resign, I’m not aware of it,” Siri said. “Tria was very prudent, his concern was to not give an idea that we would increase debt.”

“Tria’s contribution is important,” Siri said. But he added: “He’s not the victim of the system, he knew about the government contract” -- a reference to the program which Five Star and the League agreed on before the administration was sworn in on June 1.

©2018 Bloomberg L.P.