Italy doesn’t budge in clash with EU over budget deficit

The Italian government has insisted that the spending is necessary to promote growth after years of austerity

Luigi Di Maio, Italy's deputy prime minister. The euro is under pressure after Rome resubmitted its budget plan. Bloomberg

Italy’s populist government maintained its controversial 2.4 per cent budget deficit in responding to EU demands for changes, but made tweaks during a late-night cabinet meeting Tuesday, including adding plans to sell off some government real estate.

Deputy Prime Minister Luigi Di Maio told reporters in Rome that the government was not changing the ambitious social spending plans in its draft budget because "it is our conviction that this manoeuvre is what the country needs to relaunch".

The government has insisted that the spending is necessary to promote growth after years of austerity.

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A letter to Brussels being prepared by Economy Minister Giovanni Tria would outline plans to raise cash through the sale of secondary real estate, which Mr Di Maio said would have an impact on Italy's stubbornly high public debt. He didn't specify what would be sold, but said it would not include "the family jewels".

Mr Di Maio also suggested there would not be a safeguard clause that would trigger spending cuts in the event that the deficit target was overshot, as Italian media had reported. He said the government was committed to staying within the 2.4 per cent of GDP deficit target.

“We won’t play sly foxes with the deficit,” he said. “But at the same time we will maintain commitments to Italians made in the government contract. There will be all the cuts of waste, cuts of useless military spending and there are the social measures to give back social rights to Italians.”

European officials have staunchly opposed the 2.4 per cent deficit, which is more than three times the target of the previous government, and at a level that would keep Italy from reducing its debt load as it had promised.

Italy's debt is currently about 130 per cent of GDP, far above the EU limit of 60 per cent and the second highest in Europe after Greece. The big concern is that doubts about Italy's debt could rekindle financial turmoil, as well as questions about the future of the euro.

The EU rejected Italy’s draft budget, saying it broke the rules, and gave the government until midnight Tuesday to submit a new version. The Italian government could face sanctions if it does not comply.

The plan to sell real estate was unlikely to persuade Brussels, especially since the positive impact is not assured. Selling government properties was also a hallmark of the technical government of Mario Monti, which had forecast in 2011 raising as much as €30 billion by 2020 with the sale of government properties.

The stand-off has unsettled investors, who have sold off Italian debt in recent months, pushing up the country’s borrowing rates. That could be dangerous because higher rates can hurt Italy’s public finances, reinforcing investor concerns, in a vicious cycle.

Such a scenario could require the government to make cuts during a moment of economic uncertainty. "This could transform a slowdown into a recession," the International Monetary Fund said in its report, a regular review of the Italian economy released on Tuesday.

It recommends Italy tighten its public finances instead and predicts that the government will miss its own targets, with the deficit hitting an estimated 2.7 per cent next year.

The IMF warned the Italian government that its plan to sharply increase spending carries “substantial” risks and would leave the country vulnerable to market turmoil. It urged Italy “to put to rest any concern about public debt sustainability, which recently has resurfaced”.