Italy Cabinet Approves 2020 Draft Budget, Submits Plan to EU

(Bloomberg) -- Italy belatedly submitted its budget plan to the European Commission after a contentious late-night meeting that highlighted the divisions in Premier Giuseppe Conte’s coalition.

The Rome-based government said in a statement it agreed on a draft budget which includes foregoing a planned value-added tax increase, making new funds available for public investment and a reducing the tax burden on workers.

Italy, the euro area’s third-largest economy, sent the budget plan to Brussels in the early hours of Wednesday morning, having been scheduled to submit it for review by the end of the previous day. The budget must also approved by the Italian parliament before the end of the year.

Despite rising debt and a stagnating economy, Conte’s government has promised a mildly expansionary budget that would see the country’s structural deficit -- which strips out one-off measures -- widen slightly in 2020 before narrowing again in coming years.

But the proposal will require ample flexibility from the European Union to allow Rome to finance initiatives costing about 30 billion euros ($33 billion) with only 17 billion euros of resources, even factoring in spending cuts and measures against tax evasion.

The plan also calls for scrapping an unpopular fixed fee paid by medical patients, which will mean more funds will be needed for the national health system. Italy has also proposed changes to the pension system, two funds for state and regional investments, and more resources for industrial innovation.

The country’s fiscal plans are already under intense scrutiny given its outsized liabilities.

Public debt increased to 138% of gross domestic product in the second quarter, according to Bloomberg calculations based on new data released by the Bank of Italy on Tuesday. That’s just under the high of 138.8% reached in the second quarter of 2015.

Still, investors have been scooping up Italian debt, driving down yields amid optimism over the European Central Bank’s new stimulus effort and the expectation that budget negotiations with the European Union will be smooth.

Last year, Italy’s populist government -- also led by Conte but supported by a different coalition -- twice narrowly avoided EU censure over its spending plans, after tense standoffs that pushed up yields and raised investor concerns over debt sustainability.

To contact the reporters on this story: Alessandro Speciale in Rome at aspeciale@bloomberg.net;Julia Fioretti in Hong Kong at jfioretti4@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, Jerrold Colten, Chiara Albanese

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