Italy tells EU it will stick to big-spending budget

Italy's populist government on Monday responded to EU criticism of its budget with a vow to stick to its public spending hike, while keeping within its own deficit limits.

Italy tells EU it will stick to big-spending budget
L to R: Italy's Deputy Prime Minister Luigi Di Maio, Prime minister Giuseppe Conte and Deputy Prime Minister Matteo Salvini. Photo: Filippo Monteforte/AFP

Prime Minister Giuseppe Conte told journalists today the Italian government would ‘solemnly respect’ the EU’s deficit limits, after the coalition sent a letter to EU officials in Brussels.

“The figure of 2.4 percent (deficit to GDP ratio in 2019) is a ceiling that we have solemnly undertaken to respect,” Conte said.

“It's possible that we don't reach it, but it's certain that we won't exceed it.”

Speculation is now growing that the European Commission, which checks and approves euro zone budgets before they’re adopted by national parliaments, could decide for the first time ever on Tuesday to ask a member state to revise its draft budget.

Italy's deficit itself is not problematic: it has been below the EU's set limit of three percent of GDP since 2015, and in 2018 it should be 1.7 percent.

But in the October 3rd ‘people’s budget’ draft the Italian government rattled Brussels and the markets with its plan to increase overall spending, instead of cutting it, and forecasting a public deficit of 2.4 percent of GDP in 2019.

A deficit of 2.4 percent of annual economic output next year would be triple the amount forecast by the previous Italian government and comes close to the EU’s limit.

That in turn would aggravate Italy's already massive debt mountain which, at some 130 percent of gross domestic product (GDP), is way above the EU’s 60 percent ceiling and second only to Greece's in Europe.

READ ALSO: EU slams Italy's 'unprecedented' breaking of budget rules

The government had until midday today to reply to Brussels' concerns about the cost of its draft budget aimed at stimulating growth.

In its four-page letter to the European Commission, Italy's government admitted its new big-spending budget was “not in line with the norms of the stability and growth pact” governing EU member state public finances.

Photo: Filippo Monteforte/AFP

“It was a difficult decision but necessary given the delay in achieving pre-crisis GDP levels and the dramatic economic situation of the most disadvantaged in Italian society,” the letter said.

Conte said this morning: “We’re not hot-headed. If we had adopted a different budget we would have gone into recession,”

“We want a dialogue with European institutions in a spirit of faithful collaboration and constructive dialogue.”

 Aimed at fulfilling electoral promises, Italy's planned spending boost is what the government calls its “people's budget”.

It includes a series of pension and tax changes costing 37 billion euros ($43 billion), of which 22 billion will be paid for by borrowings, expanding the deficit.

Tensions have been running high between Italy and the European Commission since the budget proposal was announced.

The European Commission formally warned Italy last week that its plans for 2019 were a serious concern, sending a letter to Rome to warn that it did not rule out rejecting the entire budget.

If left unsatisfied the commission can ask Italy to revise the budget and deliver a new plan in three weeks. If Rome remains defiant, then Brussels, backed by the ministers, can open an “excessive deficit procedure” which could theoretically lead the way to financial sanctions.

READ ALSO: Here are the main things included in Italy's 'people's budget'