Italian Populists’ New Budget Math May Be Hard for EU to Believe

(Bloomberg) -- Italy’s decision to lower its 2019 budget-deficit target this week had markets celebrating, but with no changes to its spending plans, the country’s next challenge will be to convince investors and officials that the math actually adds up.

Under pressure from the European Union, Italian Prime Minister Giuseppe Conte on Wednesday offered a deficit of 2.04 percent of GDP for next year, a significant climb down from the previous target of 2.4 percent. But he also told reporters in Brussels that the populist government won’t cut any of its costly election promises, including an income for the poor and a lower retirement age.

“The likelihood of the budget deficit actually coming in at 2.04 percent is fairly minimal,” Rabobank strategists including Richard McGuire wrote in a note to clients. Among reasons, they give the lack of real spending cuts and the government’s “very ambitious” forecast of 1.5 percent GDP growth for next year.

Italy’s GDP is seen growing just 0.9 percent in 2019 in a survey of economists conducted by Bloomberg News. The economy actually contracted unexpectedly in the third quarter.

The European Commission didn’t even believe Italy’s 2.4 percent projection in the first place. When the initial budget plan was rejected in November, the commission produced an analysis showing Italy’s spending plans would push its deficit to 2.9 percent (and the Italian Parliament’s budget watchdog also had its doubts).

While Italy’s 10-year yields fell to the lowest level since September after Rome proposed the cut to the headline deficit, the EU may struggle to match investors’ optimism unless it’s backed up with more revisions to the substance of the spending program.

©2018 Bloomberg L.P.