Uncertainty around the Italian budget increased once again this week as, despite huge pressure from the EU and third parties such as the IMF, the Italian cabinet approved the draft budget which includes plans to massively increase spending next year, taking the country’s budget deficit up to 2.4% of GDP.
Italy To Renege On Promise of 1.8% GDP Deficit Target
While this level is within the European Commission’s 3% upper limit, it is far higher than the initial promise of a 1.8% GDP deficit that the government made originally. Furthermore, the government’s plans to increase spending stands contrary to EU which state that countries with high levels of indebtedness should focus on balancing their budget.
The 2019 budget plans of the coalition include raising welfare spending, reducing some taxes, scaling back the unpopular pension reforms activated in 2011 which raised the retirement age.
Government “Extremely Happy” With Budget
Speaking at a press conference on Monday, Deputy Prime Minister Matteo Salvini, head of the Lega party, said:
“I am extremely happy, we are keeping our promises, slowly but bravely. We are dismantling the previous pension law, giving back the right to work at 400,000 Italians. We are not raising taxes of any kind for 2019.”
The coalition government, which is made up of the right-wing Lega party and the anti-establishment Five Star Movement has fiercely defended its decision which it says is simply it keeping the promises made to the electorate during the election campaign.
Prime Minister Giuseppe Conte echoed this sentiment, telling reporters:
“This is the outcome of a lot of work and a lot of meetings that we have transparently made public. We have worked on a project, more than on a budget, we have worked on a project that the country needs, that citizens need. And, best of all, we are keeping the accounts in order, and delivering on our promises at the same time.”
EC Expected To Reject The Proposal
However, it is widely expected that the EC will turn down the budget proposal in line with comments made by EC officials and EU political leaders over recent months in response to reports of Italy’s budget plans.
Indeed, the IMF recently weighed in on the issue pleading with Italy to aim for a lower budget deficit target saying that the country, which currently has a debt of around 130% of GDP, was risking financial ruin with its budget plans as well as breaking EU rules.
Italy submitted its budget proposal to the EC yesterday ahead of the midnight deadline and will now wait to hear back from the EC with its decision which could be returned within a week following a review period.
Aside from the increased deficit target, the EC might also have some problems with some of the assumptions that the budget proposal relies on such as the government’s forecasts that debt to GDP (currently around 130%) will fall to 126.7% by 2021.
Italian Borrowing Costs Rising
The uncertainty around the budget proposal has already caused tighter financial conditions for Italy which has seen its borrowing rates on international money markets increase over recent months as investors grow fearful over the financial health of the country. Italian government bonds are currently around 1% to 1.5% higher than they were a year ago and there are concerns that these debt servicing costs could rise even higher. Italy currently has the second highest debt to GDP ratio in the EU, behind Greece, and the market is worried that such a budget will tip the country over the edge.
Technical Perspective
EUR/USD has been higher over recent days after trading down to pierce the 1.1478 level. Price has since recovered and is now sitting just below the 1.6148 resistance level which, if broken will bring the 1.7077 level into focus.