Italy Raises Deficit Target, Risking Fresh Conflict With The EU

(Bloomberg) -- Italy cut its forecast for economic growth and raised the projected budget deficit, setting the stage for a fresh conflict between the populist government and the European Commission.

Gross domestic product is forecast to rise 0.1 percent this year, down from a previous estimate for a 1 percent expansion, according to a draft document of the new economic and financial outlook obtained by Bloomberg News. The deficit forecast for 2019 is 2.5 percent of GDP, while the target which includes the impact of planned policy measures is for 2.4 percent.

The wider deficit forecast could revive tensions with the Commission after months of wrestling at the end of 2018 which resulted in a promise from Italy to stick to a deficit of 2.04 percent of GDP. With growth lower than expected, the money to keep the promise isn’t forthcoming. Nor is the government keen on measures that would dampen growth, with Finance Minister Giovanni Tria stating recently that restrictive fiscal moves would be “absurd.”

Italy stocks extended losses after the report, with the FTSE Mib index down 0.4 percent at 3.00 p.m. in Milan. The spread between Italian and German 10-year bonds widened by 4 basis points.

"The deficit is the most thorny issue for Italy and could spark tensions with the European Union," said Vincenzo Longo, an analyst of IG Markets in Milan. "We are expecting negative growth in the first part of the year and the numbers the government is going to debate seem too optimistic. The government isn’t likely to push the issue however until after the European vote in May."

According to the draft, the coalition government of Five Star and the League is planning to introduce new tax brackets of 15 and 20 percent on personal income, a measure that has been backed by the pro-business League.

Italy is planning to use a contingency fund of 2 billion euros ($2.2 billion). That could allow it to comply with its commitment on the structural deficit, or net of the effects of economic growth, which Rome agreed with the commission in December after lengthy negotiations.

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

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, ;David Merritt at dmerritt1@bloomberg.net, Alessandra Migliaccio

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