Renzi gambles on EU backing bumper budget

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Prime Minister Matteo Renzi is putting the final touches to a budget which could inject €27 billion into Italy's sickly economy. Photo: Olivier Morin/AFP
13:22 CEST+02:00
Prime Minister Matteo Renzi was on Friday putting the final touches to a budget which could inject €27 billion into Italy's sickly economy next year - if he can get it past Brussels.

The plan for an ambitious programme of tax cuts and investment financed partly through an increased deficit represents Renzi's biggest challenge yet to the way in which the European Commission applies the eurozone's supposedly strict budget rules.

Economists are sceptical that Renzi will be granted all the leeway he wants, which he says could potentially free up some €17 billion for measures to promote jobs and growth.

"Brussels will allow some fiscal slippage, but not €17 billion," Holger Schmieding, chief economist at Berenberg Bank, told AFP.

But the centre-left premier bullishly insists that his plans are both within the rules and vital to secure the growth Italy needs to put its public finances in order.

"We cannot cut the deficit purely by cutting spending, that is foolish," he said earlier this week.

On top of the funds released by the EU rules being applied flexibly, Renzi is counting on higher growth to finance his plans.

The budget due to be approved by Renzi's cabinet on Friday evening includes revised GDP growth predictions of 0.9 percent for this year and around 1.6 percent for 2016.

Pierre Moscovici, the European Commissioner in charge of overseeing the finances of eurozone commissioners, was in Rome on Friday to begin the haggling over the detail of the Italian tax and spending plans.

There is concern in Brussels that Renzi's widely-trailed plans will slow the pace at which Rome reduces its €2.2 trillion debt mountain - equivalent to more than 130 percent of the country's entire annual economic output.

Moscovici diplomatically rejected suggestions that Renzi was regarded as the naughtiest boy in the euro class.

"I would not define Italy as being under special surveillance," the former French finance minister told Corriere della Sera.

"We will examine the budget on the basis of European rules, taking into account all the relevant factors and the high debt level, which is a central factor for Italy."

Light at end of tunnel

Italy said earlier this year that it would aim to bring its deficit down to 1.8 percent of GDP in 2016.

But Renzi has now jettisoned that target in order to fund a fiscal giveaway involving the abolition of a loathed tax on primary residences as well as charges on municipal services and farm buildings.

European Commission officials have privately questioned if these measures are the most efficient use of public finances to fuel growth, suggesting they may be more about consolidating Renzi's electoral standing.

Aides to Renzi reply that they should be seen as part of a broader 2013-18 programme designed to ease Italians total tax burden by some €50 billion - the bulk of which will involve reductions in corporate and labour taxes.

Economists expect the 2016 measures to result in the deficit for next year coming in around 2.2 percent.

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This is comfortably under the EU's three percent ceiling but means the reduction in Italy's debt level is likely to be very marginal - and may not happen if growth turns out to be weaker than the government anticipates.

The European Central Bank this week criticised Italy for failing to use its recent windfall gains from lower debt servicing costs to cut its deficit.

But Renzi maintains the priority has to be growth in an economy which has barely expanded in the last decade and a half but is finally beginning to see some light at the end of the tunnel.

This summer saw an unexpectedly sharp turnaround in economic activity.

With the help of a weaker euro, cheaper oil and Renzi's labour market reforms, industrial output spiked, unemployment fell to a two-year low and exports hit record levels in July.

The budget will seek to consolidate the trend by including a major investment programme for Italy's impoverished south.

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