Italy Looking at Changes to 2019 Deficit Target

(Bloomberg) -- Italian Deputy Premier Matteo Salvini signaled a new openness to change the nation’s budget deficit target for next year, the focus of a standoff with Brussels over the populist government’s spending push to fund election promises.

Asked whether a 2.4 percent target is set in stone, Salvini told newswire AdnKronos: “I think nobody is fixated on this, if there is a budget which makes the country grow, it could be 2.2 percent or 2.6 percent.”

Salvini will meet with Prime Minister Giuseppe Conte, Finance Minister Giovanni Tria and fellow Deputy Premier Luigi Di Maio to discuss the budget on Monday, an official said, adding that figures being discussed in the media are baseless and that Tria may present different budget goals at the meeting. The country is examining changes to its 2019 deficit target, the official said.

“The problem is not about decimal points, it’s a question of seriousness and being concrete," Salvini was cited as saying. The deputy premier said a pension reform to lower the retirement age, one of his key election campaign pledges, could come into force in February.

Armando Siri, an economic adviser to Salvini, said in an interview with newspaper Il Messaggero that “a little fine-tuning of the budget” can be evaluated to avoid an increase in turbulence in the markets. He said only some measures are subject to possible change, and voters expect campaign promises to be kept.

Both Salvini, leader of the anti-migration League, and fellow-deputy premier Luigi Di Maio of the anti-establishment Five Star Movement have so far stuck to deficit and growth targets in a clash with the European Commission, which may impose fines on the country amid concerns on Italy’s debt.

Budget Talks

Salvini and Di Maio are due to meet Prime Minister Giuseppe Conte to discuss the budget, which aims to fund welfare benefits, tax cuts and the pension reform, on Monday evening. Conte spent part of the weekend in Brussels seeking to sell the budget to commission head Jean-Claude Juncker and European leaders.

Messaggero said the meeting would be “decisive” as the leaders consider various adjustments.

But the European Union’s take-it-or-leave-it stand on Brexit at the Sunday summit doesn’t bode well for Italy. The bloc left Theresa May with little room for political maneuvering to sell the deal in the U.K. Parliament. Leaders insisted the Brexit agreement was the best available and non-negotiable.

If Conte and his euro-skeptic deputies were hoping for concessions from the EU, the stance on Brexit must have left them disappointed. All Conte won at a working dinner with Juncker on Saturday was a pledge to continue talks over coming weeks as Italy seeks to avert, or delay, possible fines.

Conte was left acknowledging that the dinner “didn’t resolve matters” and voicing optimism that the dialogue ahead could stop the EU cracking down on Italy over the deficit target and concerns -- shared by financial markets -- of an impact on the country’s debt mountain, the euro area’s biggest in real terms.

“I doubt that Italy will drastically change its budget,” said Lorenzo Codogno, visiting professor at London School of Economics and a former chief economist at the Italian finance ministry. “Still, there are significant openings, and there is still some time to at least partly change direction. If that happens, it may indeed prove market friendly.”

Atmosphere, Trust

“There’s a good atmosphere, mutual trust,” Conte told reporters after the summit. “We’re confident we can complete the process to our mutual satisfaction.” Asked if he would discuss lowering the 2.4 percent target with Salvini and Di Maio, Conte replied: “We always discuss the reforms and what is needed to carry out the promises we have made.”

On arrival at the Brexit summit, Conte held up a thick dossier that he previously gave Juncker, entitled “A new path for a better future. Italy’s new strategy for social and economic growth.”

“This is what we talked about, I’m giving you a preview,” Conte said. “We talked about these, in five months we are revolutionizing the country and we will continue to do so.” His office said the report details past reforms and those due in coming weeks, focusing on a plan to boost investments.

Debt Concerns

What irks the commission and investors most however are the targets for the deficit and for 1.5 percent economic growth next year. Conte said budget targets were not discussed with Juncker.

At the dinner Juncker said spending cuts of 6 billion euros ($6.8 billion) to 7 billion euros may be enough to trim the 2019 deficit, newspaper La Repubblica reported Sunday. Juncker also called for Salvini and Di Maio to stop their verbal attacks on the EU, the paper said.

Conte may offer to postpone to April the start of a “citizen’s income” for the poor, a landmark Five Star pledge, and a reform to lower the retirement age, a League promise, in order to recover as much as 5 billion euros that would be used for investments, newspaper Il Sole 24 Ore said.

Juncker sounded an affectionate note. “We are not in a war with Italy,” he said Sunday morning. He added, speaking in Italian: “Ti amo Italia (I love you Italy.)” Juncker said he and Conte had agreed to keep in “permanent contact” to help reduce the differences between the two sides.

The commission said this month that Italy wasn’t respecting EU rules on borrowing, which may lead to a so-called excessive deficit procedure. That could involve fines of 0.2 percent of Italy’s gross domestic product, increasing to 0.5 percent if Rome doesn’t amend its budget.

--With assistance from Lorenzo Totaro.

To contact the reporter on this story: John Follain in Brussels at jfollain2@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Steve Geimann, Kevin Costelloe

©2018 Bloomberg L.P.