October 4, 2018 / 9:42 AM / 2 months ago

Italy dismisses concern the EU will reject its budget plan

ROME, Oct 4 (Reuters) - Italy’s populist government on Thursday dismissed concerns that the European Commission will reject its plan to hike deficit spending next year and signalled that it would not backtrack, even under market pressure.

After a selloff hit Italian bonds on Tuesday, the government made up of the anti-establishment 5-Star Movement and the right-wing League late on Wednesday watered down its original plan to keep its deficit steady at 2.4 percent of gross domestic product (GDP) in 2020-21.

But it stuck to its 2.4 percent target for next year, and on Thursday morning government officials said they had no plans to make further revisions to that goal, which is three times more than one set out by the previous government.

Speaking about the multi-year budget targets that must be reviewed by Brussels by mid-month, Deputy Economy Minister Massimo Garavaglia said on Thursday: “(Either) it passes or it doesn’t, but this isn’t the problem. We’re more focused on what is happening in the markets.”

Garavaglia also said the government’s GDP growth forecast for next year, which has yet to be published, would be 1.6 percent, much higher than the 1.2 percent median projection of 51 analysts polled by Reuters last month.

The gap between Italy’s benchmark 10-year bond yields and their safer German equivalent on Tuesday widened to more than 300 basis points, its widest since May, on concerns about Italy’s plans. On Thursday, the spread was at 278 basis points.

League leader Matteo Salvini, speaking on RAI state radio, said that next year’s deficit spending was needed to spark growth and create jobs, and added that the government would not back down even if the spread widened to 400 basis points.

“This is a budget that looks to the future, and we will absolutely not go backwards,” Salvini said.

The government’s confident tone came as la Repubblica newspaper reported that the commission had already sent Italian officials an informal note saying it would reject next year’s spending plans.

Sources close to economic commissioners in Brussels said the report was “unfounded”. The commission must formally give its opinion on the budget forecasts by the end of the month.

Separately, deputy prime minister and 5-Star leader Luigi Di Maio denied an article in Il Fatto Quotidiano saying the government was seeking a cabinet reshuffle, mainly to replace Economy Minister Giovanni Tria in December or January.

Di Maio also seemed unfazed by concern expressed earlier this week by commissioners and EU allies over the deficit spending plans.

“We have brought home the people’s budget, and we’re going to forge ahead more determined than before,” Di Maio said in an interview with Radio Radicale. “Now we can start a serious and healthy discussion with the European Commission to reach a positive conclusion.” (Reporting by Giuseppe Fonte and Steve Scherer; Additional reporting by Giselda Vagnoni and Giulia Segreti in Rome and Francesco Guarascio in Brussels; Editing by Hugh Lawson)

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