Reality will tame next Italy PM’s spending plans

Leader of the far-right Brothers of Italy party Giorgia Meloni speaks during a demonstration by centre-right opposition parties in Rome, Italy, July 4, 2020. REUTERS/Remo Casilli

MILAN, Aug 11 (Reuters Breakingviews) - Italy’s likely next government has some big spending plans. A coalition of rightist parties looks poised to win general elections in September, making Giorgia Meloni of the nationalist Brothers of Italy party prime minister. High public debt and European Union vigilance will puncture the group’s wildest trial balloons.

The abrupt fall of Mario Draghi’s executive last month paves the way for yet another Italian government. An alliance including Brothers of Italy, the anti-immigration League and ex-premier Silvio Berlusconi’s Forza Italia would command 49% of votes, opinion polls show, well ahead of its divided political rivals. Meloni’s party, which has roots in post-war neo-fascism, opposed Draghi’s agenda and has a eurosceptic past, may capture 24% of the vote.

High on the alliance’s agenda is slashing taxes to boost consumer demand. While the group has yet to publish an official manifesto, its plans include extending a flat tax rate of 15% to self-employed workers earning up to 100,000 euros annually from 65,000 euros currently. That’s manageable. A bolder plan to extend the treatment to all workers and pensioners could however lower the government’s tax revenue by around 40 billion euros a year, says economic professor Massimo Baldini, or more than 2% of Italy’s annual output. That would make it harder to reduce public debt, seen at 147% of GDP this year.

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Meloni’s coalition also wants to rejig a 200 billion euro post-pandemic investment plan agreed with the European Commission. True, the war in Ukraine suggests more funds could be spent on energy infrastructure. Yet any changes will need Brussels’ backing, putting at risk the disbursement of cash crucial to lift Italy’s growth.

Finally, Meloni also favours a bigger state presence in Italy Inc. That may endanger agreed privatisations such as that of Alitalia’s successor ITA and of lender Monte dei Paschi di Siena (BMPS.MI).

Yet, Italy needs the support of investors to refinance its debt. Market jitters forced a previous anti-establishment executive to curb expensive fiscal projects in 2018 and 2019. Moreover, the European Central Bank signalled in July it will intervene to support countries facing speculative attacks only if they abide by Europe’s fiscal rules and don’t blow up their public finances. And rising government bond yields, with the spread over 10-year German Bunds doubling to 200 basis points in one year, suggest Italy cannot take bond markets for granted. Such external constrains will temper any radical fiscal moves.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Refiles to fix typo in paragraph one.)

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Italy will hold a general election on Sept. 25.

A rightist government coalition that includes the nationalist Brothers of Italy party, the anti-immigration League and Silvio Berlusconi’s Forza Italia would command 49% of votes, according to an Aug. 9 opinion poll by pollsters Quorum and YouGov.

The Brothers of Italy party, which has roots in post-war neo-fascism and is led by Giorgia Meloni, is Italy’s most popular party with support of 24%. The party was in opposition while outgoing Prime Minister Mario Draghi led the Italian government.

Meloni, who in the past has supported Italy leaving the euro, recorded on Aug. 10 a video message in three languages saying a future government led by her would not threaten the country’s financial stability and would stick to Rome's traditional alliances such as the European Union and NATO.

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Editing by Neil Unmack and Streisand Neto

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