Italy Is Said to Cut Growth Forecast as Budget Battle Heats Up

(Bloomberg) -- Italy’s populist government is planning to slash its growth forecast for next year as it fights to persuade the European Union that its spending plans and budget projections are credible.

Italy will reduce its GDP outlook for 2019 to 0.9 percent or 1 percent from 1.5 percent, according to a Treasury official, who asked not to be identified because the change is not public yet.

The coalition in Rome is trying to convince the EU’s budget inspectors that its 2019 spending plan will really deliver a deficit of around 2 percent of GDP as it has forecast. Analysis by the European Commission last month suggested that the deficit would actually be close to 3 percent.

The populist government, made up of the rightist League and the anti-establishment Five Star Movement, is fighting with Brussels to avoid sanctions over its contentious 2019 budget ahead of a year-end deadline to get the spending program through parliament.

Rome and Brussels are still up to 3 billion euros ($3.4 billion) apart, and divided on measures to bring down the structural deficit, Italian media reported, after Prime Minister Giuseppe Conte summoned Finance Minister Giovanni Tria for urgent talks late Monday.

Italy Is Said to Cut Growth Forecast as Budget Battle Heats Up

With Conte and Tria waging a long campaign to rein in euroskeptic Deputy Premiers Matteo Salvini and Luigi Di Maio, the main powers behind the government, a revised budget bill has yet to be presented to the Senate. The new package has to be approved by both houses before the end of the year. Missing the deadline would be a political embarrassment for an administration fighting for credibility and could delay the delivery of expensive election pledges.

‘Common Sense’

“I hope Brussels will show common sense,” Salvini told Rete 4 television late Monday. “They count even the hair in Italy’s nostrils, and they let Macron’s France do whatever it wants.”

Salvini and Di Maio have repeatedly complained that the commission treats Italy and France differently, especially after the French President promised extra spending to try to defuse the Yellow Vest protests.

Salvini said Rome has done what the commission asked it to do: “If they ask us to cut again, no, that’s enough,” he said.

Salvini said the cost of lowering the retirement age, a key pledge for his anti-migration League, had been cut by 2 billion euros. Conte’s office has said the cost of a citizen’s income for the poor, sponsored by Di Maio’s Five Star, has been cut by a similar amount.

Italy has made all possible concessions already, Di Maio said on Rai radio. “There will be no agreement if they ask us to betray Italians,” he said.

Still, Rome’s concessions thus far may not be enough to ward off a “procedure” from Brussels, including possible fines. The commission is seeking 2.5 billion to 3 billion euros of cuts in Italy’s structural balance, which strips out one-off expenditures and the effects of the economic cycle, according to newspaper Corriere della Sera.

The commission, whose senior officials could discuss Italy’s case at a meeting Wednesday, is divided on whether to start an infringement procedure, according to daily la Repubblica, with commissioner Valdis Dombrovskis taking a hawkish position, and his colleague Pierre Moscovici more conciliatory.

©2018 Bloomberg L.P.