Tria’s Balancing Act Leaves Investors Concerned About Italy’s Government

(Bloomberg) -- Italy’s Finance Minister Giovanni Tria spelled out his fiscal balancing act as the clock ticks down for the government’s decision on its fiscal targets and the ruling coalition’s leaders renew their demand for more spending.

Addressing the Italian business community at a Bloomberg-organized conference in Milan on Tuesday, Tria highlighted priorities including a reduction in the income tax burden and improving social protection for the poor. The finance chief also said he’s aiming for a “manageable budget impact” with an emphasis on more public investment.

Tria’s Balancing Act Leaves Investors Concerned About Italy’s Government

“It is essential that public investment in infrastructure will be a core part of the budget,” he said. “The investment level has fallen by 30 percent in the last years due to protracted recession and to a lack of spending. Public investment must get back at least to 3 percent of GDP.”

Bond yields had risen earlier on news reports of clashes within the government over spending plans and questions over Tria’s future. His speech marked another attempt by the under-pressure finance chief to balance the costly election promises of Italy’s government with demands from the European Union and investors.

Late Tuesday, news agency Ansa quoted Five Star Movement leader Luigi Di Maio as saying “a serious government minister must find the money somehow” for the populist programs. Di Maio, one of two deputy premiers, denied an earlier newspaper report he may seek Tria’s ouster due to clashes over the 2019 budget preparation.

Some Concern

Speaking at the Milan event before Tria, UniCredit SpA Chairman Fabrizio Saccomanni noted the government’s commitment to reducing the deficit-to-GDP ratio.

“The markets reacted with some concern initially,” said Saccomanni, a former Italian finance minister. “There is now a more sort of relaxed attitude in the hope and expectation eventually that the budget will be in line with a need of reviving the economic activity while keeping the key parameters of fiscal policy within the agreed guidelines.”

Tria added in his speech that the government is committed to implementing its program over its full, five-year term in office, while Italy races to catch up with the economic growth of its EU partners.

Italy’s 10-year bond yield fell 5 basis points to 2.8 percent as of 4:54 p.m. in Milan, after erasing some gains in early trading following the reports of a clash between Tria and Five Star’s Di Maio over spending.

Given its large public debt, the country can’t afford to let its budget deficit balloon out of control. Corriere della Sera has reported that Tria will set an upper limit of 1.6 percent of output on the 2019 deficit. That’s twice the goal set by the previous government, but will still limit the government program.

Tax Burden

“The government is committed to reducing the tax burden, and this goal goes well beyond flat tax,” Tria said at the Milan event. “We are at an advanced stage in designing a simplified personal income tax, which will meaningfully reduce the burden on the middle class, but with a manageable budgetary impact.’

The Treasury will be able to set its new forecasts and targets only after statistics office Istat releases the final reports on 2017 gross domestic product on Friday. The deficit figure for next year will be central to the draft spending plan that has to be submitted to the European Commission by Oct. 15. The budget will also take into account slower-than-expected economic growth this year while avoiding a value-added-tax increase that’s set to take effect under current legislation.

The populist government took over on June 1, frequently rocking financial markets with conflicting statements from the ministers on the economic-policy priorities.

Italian bonds rose this month as the Five Star Movement and the League, the two parties in the populist government, sent reassuring messages about the deficit, including keeping it within EU limits. That’s helped to push 10-year yields back below 3 percent.

“The market constraints and the EU are going force them to give the budget deficit for next year around the current level as a share of GDP -- that’s a positive and the euro membership is not on the table,” Nouriel Roubini, chief economist at Roubini Global Economics, said in an interview with Bloomberg Television. Still, with a debt at over 130 percent of output “Italy is too big to fail and too big to be saved,” he said.

Italy’s rating outlook was lowered last month by Fitch Ratings, which cited the fiscal plans and “political uncertainty.”

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