(Bloomberg) -- The governor of the Bank of Italy urged caution on the nation’s populist government, warning of a negative market reaction and an “unsustainable” risk for the country’s massive debt, as the Five Star Movement pressed for a wider deficit in the 2019 budget.
Ignazio Visco, speaking Saturday at a conference in Varenna, warned against an unproductive budget-deficit hike given Italy’s existing burden, which trails only Greece in the euro region as a proportion of the economy. A negative market reaction would rapidly worsen the nation’s debt-to-GDP ratio, Visco said.
Given “the negative impact on economic growth due to the interest-rate increase and the crisis of confidence, the ratio would soon be on an unsustainable trajectory,” Visco said, reminding his audience how much debt the government needs to place in the market every year.
With the government of the anti-establishment Five Star and the anti-migrant League party setting new public finance and economic growth targets, tensions are rising within the cabinet as both organizations seek funds to deliver on campaign promises including a “citizen’s income” for the poor, tax cuts and rolling back pension reform. The government is due to present a draft 2019 budget for inspection to the European Commission in Brussels by mid-October.
Tria Clash
Visco ended his speech by telling the government that “the budget objectives must be and appear strongly and credibly oriented to financial stability.” His appeal for caution came only a day after the latest clash between Five Star and Finance Minister Giovanni Tria at a meeting on the budget, which included premier Giuseppe Conte and deputy premier Matteo Salvini, the League’s chief.
Senior Five Star officials at the meeting pressed for 16 billion euros ($18.8 billion) to 18 billion euros in extra spending, urging a deficit at 2.6 percent of output to fund measures including the citizen’s income, the newspaper La Repubblica reported Saturday. Tria refused to go over 2 percent, with “arm wrestling” over the budget lasting for hours, the paper said.
Speaking Thursday to lawmakers in Rome, the finance minister had reiterated that the government’s program will be gradually implemented and compatible with balancing public finances. The 2019 budget will start introducing some of the measures the ruling parties agreed upon, he said.
Giorgetti Remarks
Speaking at the conference in Varenna, on the shores of Lake Como, cabinet undersecretary Giancarlo Giorgetti acknowledged the importance of the European Union’s budget rules.
“We cannot neglect the limits and the commitments which come from Europe so that public finance is not exposed to other risks,” said Giorgetti, a leading League member. He said this meant the government must “use in the best way all the resources already available.”
Other members of the League have supported a wider deficit to fund spending, though not as steep as the one reportedly advocated by Five Star. Massimo Bitonci, an undersecretary at the finance ministry and a member of the League, said Friday that he believed “we could easily get to between 2 and 2.2 percent” for the deficit-to-GDP ratio, according to the Ansa newswire.
“It’s clear that a solution has to be found and that the purse strings have to be opened a bit -- that’s the way it should be,” Bitonci said. “Tria is doing his job.”
Italy plans to sell 6 billion euros of bills due Mar 29, 2019 in an auction on Sep 26.
(An earlier version of this story had an error about the order of speakers in eighth paragraph.)
(Adds information about Italian bill sale in final paragraph.)
To contact the reporter on this story: John Follain in Rome at jfollain2@bloomberg.net
To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Keith Campbell, Christopher Elser
©2018 Bloomberg L.P.
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