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U.S. Markets

Italy's 5-Star to shelve deficit-raising plans to calm markets: source

ROME (Reuters) - The 5-Star Movement, which emerged as Italy’s biggest party after this month’s election, is preparing an economic plan which will not raise the fiscal deficit forecasts of the outgoing centre-left government, a 5-Star party source told Reuters.

Anti-establishment 5-Star Movement Luigi Di Maio looks on during a news conference at the Foreign Press Club in Rome, Italy, March 13, 2018. REUTERS/Tony Gentil

The plan, to be presented in April, may surprise many supporters of the anti-establishment party, which has always pledged to raise the budget deficit in order to fund welfare spending and tax cuts.

“We are not going to propose raising the deficit at this point,” the source told Reuters, adding that the program would maintain the current goal of Prime Minister Paolo Gentiloni’s caretaker government to balance the budget in 2020.

“We know Italy is under scrutiny at the moment and we want markets to understand that we want to be responsible with public finances,” added the source, who asked not to be named.

5-Star won 32 percent of the vote in the March 4 ballot, some 14 percentage points more than its nearest rival, but the election produced a hung parliament, so it needs to find allies to be able to form a government.

5-Star and the far-right League - the leading party in a conservative coalition that won most parliamentary seats - both say they have the right to govern.

They are each preparing policy proposals to be presented in April as alternatives to the outgoing government’s multi-year economic plan, but whereas the League has maintained strong eurosceptic rhetoric, 5-Star has taken more moderate positions.

The plan it is preparing may be seen as an attempt to persuade the ruling centre-left Democratic Party (PD) to back a 5-Star government as a junior partner rather than to go into opposition as it has so far pledged to do.

The PD was the biggest loser in the election, taking less than 19 percent of the vote, but its support in parliament would be sufficient to give 5-Star a working majority.

5-Star deputy Laura Castelli told Reuters the party’s plan would center on transport infrastructure and renewable energy, with a particular focus on the poor south of the country where 5-Star garnered most of its votes at the election.

The plan will also ensure that increases in sales tax penciled in by the outgoing government to take effect from 2019 would be canceled, Castelli said.

“We want to avoid worsening the demand crisis we have been stuck in for the last decade,” she said.

Scrapping these planned tax hikes will cost state coffers some 31 billion euros ($38.08 billion) between 2019 and 2020. Castelli did not say how this shortfall would be made up.

Editing by Gareth Jones

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