Italy Targets Deficit at 2.4% of Output in Win for Populists

(Bloomberg) -- The Italian government set next year’s budget deficit target at 2.4 percent of output, after the ruling populist parties pressured Finance Minister Giovanni Tria into providing more funds for their election promises.

“A deal has been reached with the full government on 2.4 percent. We are satisfied, it’s the budget for change,” Deputy Premiers Matteo Salvini and Luigi Di Maio said in a joint statement Thursday evening following a leadership meeting. News agency Ansa said a 2.4 percent deficit was estimated for 2020 and the following year as well.

Di Maio, head of coalition partner the Five Star Movement, said separately that the government had succeeded in agreeing on a “budget for the people” that includes 10 billion euros ($12 billion) for a so-called citizen’s income that will “cancel poverty.”

Bond yields soared at the beginning of the summer in the initial alarm over the populists’ spending plans. The higher than expected budget gap may rattle financial markets again on Friday.

The first reaction from the European Union was negative. The 2.4 percent puts Italy in breach of its obligations, said an EU official from Brussels who asked not to be named, adding that the government in Rome had signaled it would push for a deficit of 1.9 percent.

Under EU rules, Italy is obliged to improve its budget balance so as to reduce its debt mountain. To see even a marginal improvement in the structural balance of the country’s budget, the headline deficit should have been around 1.6 percent, the EU official said. 

Other measures approved by the government include the reform of job centers, rolling back a previous pension reform that raised the retirement age and a new 1.5 billion-euro fund for victims of bank crises, Di Maio said.

The decision marks a win for populist movements that have been making inroads in European Union countries and it will likely have an impact on investors’ concerns about Italy’s mountainous public debt and its respect for European Union budget limits.

Tria agrees with the 2.4 percent budget deficit target set in the government talks, according to an official from the coalition partner the League, who asked not to be named discussing confidential matters. President Sergio Mattarella spoke to Tria by telephone to encourage him to stay in his post, newspaper il Sole-24 Ore said, following reports the finance chief may have been ready to quit.

The deficit agreed upon, at 2.4 percent, while not the worst-case scenario, is still somewhat worse than market expectations of 2 percent, said Mohammed Kazmi, portfolio manager at Union Bancaire Privee in an email to Bloomberg.

“We may see some spread widening as a result, and especially following the rally observed over the past month,” he said. “Attention will now turn to the details and assumptions of the budget to determine whether they are attainable or not.”

The budget is due in Brussels by Oct. 15 for a review by the European Commission. The Italian Parliament is scheduled to approve the plan by the end of the year.

--With assistance from Giovanni Salzano, Ben Sills, Alessandra Migliaccio and Jerrold Colten.

To contact the reporters on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net;John Follain in Rome at jfollain2@bloomberg.net;Chiara Albanese in Rome at calbanese10@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Kevin Costelloe, Dan Liefgreen

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