Italy Offers to Cut Deficit From 2020 in Peace Offering to EU

(Bloomberg) -- Italy set next year’s budget deficit target at 2.4 percent of economic output with a commitment to reduce it in 2020 and 2021, a partial concession to the European Union after it pressured Finance Minister Giovanni Tria to contain the ruling coalition’s spending requests.

Italy Offers to Cut Deficit From 2020 in Peace Offering to EU

Five days after the projections were due to be released, the government still hasn’t published the economic growth forecasts underpinning its plans. Those details will come Thursday, a government spokeswoman said.

“We are respecting the promises we made,” Prime Minister Giuseppe Conte said. “This is a serious budget, responsible and courageous. Our country needs strong growth.”

The populist government’s deficit goal for next year is triple the previous administration’s target of 0.8 percent of gross domestic product set back in April, which Tria repeatedly said was no longer achievable. The government aims to reduce the shortfall to 2.1 percent in 2020 and 1.8 percent in 2021.

Italy Offers to Cut Deficit From 2020 in Peace Offering to EU

Tria has been fighting a rearguard action inside the coalition government with Luigi Di Maio and his fellow deputy premier, Matteo Salvini, demanding more resources to deliver on their election promises. Tria had reportedly tried to limit the deficit target to 2 percent of GDP during last-ditch negotiations last week before ultimately agreeing to 2.4 percent.

“We promised to raise the growth rate to gradually erase the gap with the rest of Europe, which has been one percentage point in the last 10 years,” Tria said, standing alongside Conte. “With this budget we will succeed in halving the gap between Italy’s growth rate and the EU’s in the first year, in 2019.”

Speaking at an event in Rome earlier in the day, Tria said that the economic slowdown and the need to avoid an increase of the sales tax planned under existing legislation had already pushed next year’s deficit to 2 percent. The additional deficit spending will be used to fund investments and an early implementation of tax cuts and income support for the poorest households included in the government program, he said.

The government also set a commitment to reduce the debt-to-GDP ratio to 126.5 percent of GDP in 2021.

Pierre Moscovici, the EU commissioner for economic and financial affairs, said that while potential revisions to Italy’s projections were a “good signal,” an unrevised 2019 figure risks breaking the bloc’s rules.

Market Pressure

The fight over the coalition’s budget policy has pushed Italian bonds to levels not seen since the height of the euro debt crisis. The 10-year yield on Tuesday closed at its highest level since 2014 -- before the European Central Bank unleashed its 2.6 trillion-euro ($3 trillion) quantitative easing program. It fell 14 basis points on Wednesday as reports of the government’s concessions filtered out.

Italy Offers to Cut Deficit From 2020 in Peace Offering to EU

From the start of budget talks in August, Tria has been juggling the EU budget restrictions against the demands from Di Maio and Salvini, who lead the Five Star Movement and the League respectively.

The new targets will have an impact on investors’ concerns about Italy’s mountainous public debt. The government won’t avoid a clash with the European Commission, which says Italy must keep cutting the deficit at a sufficient pace to reduce the country’s debt of over 130 percent of GDP.

Bond yields soared at the beginning of the summer in the initial alarm over the populists’ spending plans. They rose again in September among reports of requests by the ruling coalition to set a target close or even above the EU limit of 3 percent of output.

©2018 Bloomberg L.P.