September 7, 2018 / 9:40 AM / 2 months ago

Euro zone peers expect Italy to cut deficit, stick to EU budget rules

VIENNA, Sept 7 (Reuters) - Italy should cut its structural budget deficit in line with European Union rules it has committed to respect, top euro zone officials said on Friday, amid signals from Rome that it wants to spend more and tax less next year.

Leaders of Italy’s ruling coalition of the far-right League Matteo Salvini and the anti-establishment 5-Star Movement Luigi Di Maio have been promising to cut taxes, introduce a universal income, lower the pension age and forego a value added tax increase next year.

To do that, Italy, which already has a debt of 132 percent of GDP, would have to increase its budget deficit, adding to market concern about its ability to repay.

“Italy has to reduce its structural deficit,” European Commissioner for Economic and Financial Affairs Pierre Moscovici told journalists on arrival for a meeting of euro zone ministers in Vienna.

“I think it’s in Italy’s interest to have a budget that will allow Italy to reduce its public debt. We will talk about figures when the budget will be prepared. But the numbers are that Italy has to reduce its structural deficit,” he said.

Last week, Fitch rating agency changed the outlook for Italian debt to negative from stable and investors have heavily sold off Italian bonds on concern over the higher spending plans since the government took office in June.

Yet Di Maio said last Sunday the government would first look after Italians before listening to ratings agencies and reassuring markets, in defiant remarks that worry euro zone policy-makers.

As the costs of borrowing for Italy rose, Di Maio and Salvini sought to tone down their rhetoric earlier this week, pledging not to increase the nominal budget deficit limit above the EU limit of 3 percent of GDP. But they said nothing about reducing the structural gap, as EU rules stipulate.

Italy, like all other euro zone countries, will have to submit its draft budget for next year to the European Commission by mid-October for checks if it is in line with EU rules. Should the draft blatantly break EU laws, the Commission has the option of sending it back to be changed.

EU rules oblige governments to keep cutting the structural deficit — a measure that strips out the effects of the business cycle and one-off income and spending — until the budget is in balance or in surplus.

Under EU rules, Italy should cut its structural budget deficit, seen at 1.7 percent of GDP this year, by 0.6 percent of GDP in 2019. But, according to statements from Di Maio and Salvini, that is unlikely to happen.

Even with no change in policies, let alone higher spending and tax cuts, the structural deficit will rise next year to 2.0 percent of GDP, the European Commission forecasts.

This puts Rome on a collision path with the Commission which has to enforce EU rules.

German Finance Minister Olaf Scholz said he assumed all EU members would adhere to EU rules.

“I think we all know that we in Europe have big tasks ahead of us. Everyone needs to sort out their own problems and I assume that everyone will adhere to EU rules,” Scholz said.

Also, the head of euro zone finance ministers Mario Centeno noted Rome was bound by EU laws on borrowing.

“The Italian government has committed to follow ... the principles of the economic policy guidance in Europe,” he told reporters. (Writing By Jan Strupczewski)

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