Rome digs in over budget plan as pressure rises

© Reuters. FILE PHOTO: Italy's Prime Minister Giuseppe Conte attends a news conference with Interior Minister Matteo Salvini after to approve a new decree of the measures on immigration and security at Chigi Palace in Rome

By Giuseppe Fonte and Steve Scherer

ROME (Reuters) - Italy's government said on Wednesday it would not backtrack on plans to increase deficit spending, digging in against financial market and EU pressure, and brushing off criticism from parliament's budgetary office.

The office on Tuesday refused to validate the multi-year budget plan, which has prompted nervous investors to shift en masse out of Italian sovereign debt, saying the forecasts for economic growth were too optimistic.

But Economy Minister Giovanni Tria, struggling to impose his views as a moderating influence on fiscal matters within the cabinet, said the government considered it appropriate to confirm those forecasts.

"The rise of yields on state bonds recorded in the past few days is certainly worrying, but I want to repeat that it's an excessive reaction that isn't justified by Italy's economic fundamentals," said Tria, addressing parliament for a second straight day.

He said deficit spending would be worth 22 billion euros next year with the budget including 15 billion euros ($17.2 billion) in cuts and extra revenue, to cover 37 billion in total additional spending outlined in the plan.

The government, which took office in June, has fixed next year's deficit at 2.4 percent of gross domestic product (GDP), three times the forecast of the previous center-left administration.

Economic growth is seen at 1.5 percent next year, 1.6 percent in 2020, and 1.4 percent in 2021. The parliamentary budget office opinion is not binding, but its rejection of the growth forecasts forced Tria to return to parliament to explain.

The budget outline has roiled markets above all concerned about the sustainability of Italy's huge debt.

But bond yields declined slightly on Wednesday after Tria - who is not a member of either of the two parties in the ruling coalition - also said he wanted to collaborate with the "authorities involved" over the budget plan.

Earlier, a leading lawmaker's mention of a possible credit rating downgrade for Italy had sent yields higher.

On Wednesday, the leaders of both coalition parties repeated that they would not give in to pressure.

On RAI state radio, anti-establishment 5-Star Movement leader Luigi Di Maio said he would not "betray" Italians by changing the budget plan.

Far-right League leader Matteo Salvini, speaking on RAI state TV, warned "speculators" against betting that the government would climb down.

Salvini said "a few big financial institutions" are "betting that Italy will backtrack (on the budget). They're wrong".