Italian Deficit Plan Risks Defying EU
By Ryan Nowaczyk
The Italian government announced on September 27 plans to increase Italy’s budget deficit to 2.4 percent of GDP for 2019 in order to fund the current coalition’s programs. The announcement has worried investors and incurred warnings from European Commission officials.
The technical European Union (EU) debt ceiling is 3 percent of GDP for any member state, but fiscal rules also require that governments enact policies to move towards a balanced budget or a surplus. Italy’s public debt is 131 percent of GDP, the second-highest in the EU after Greece, and its growth rate remains slow. According to Politico’s analysis, the deficit increase, in possible violation of EU rules, reflects Italian party leaders’ populist platforms and their opposition to EU intervention.
The 5-Star Movement (M5S) and The League, which govern in a coalition represented by Deputy Prime Ministers Luigi Di Maio and Matteo Salvini, respectively, took office in June after March elections. According to Politico, the parties campaigned on platforms including a universal basic income, a minimum pension of €780 ($900) a month, and an income tax cut for one million workers. Reuters also listed a lower retirement age and investment in infrastructure as other key campaign promises. These programs would cost a total of €20 billion ($23 billion), half of which would go toward M5S’s “citizens’ income.”
The previous center-left government wanted a 0.8 percent GDP deficit. Italian Minister of Economy and Finance Giovanni Tria, who belongs to neither ruling party, had proposed a 1.6 percent GDP deficit limit, allotting €12 billion ($13.8 billion) for government spending, but party leaders demanded more. In a September 27 cabinet meeting, Tria agreed to the 2.4 percent deficit, and the cabinet approved the document outlining the 2019 budget law. As Politico reported, Di Maio proclaimed, “It’s a budget for the people that doesn’t favor the powerful.”
Brussels disapproves. Reuters quoted European Commission President Jean-Claude Juncker’s claiming that the deficit could lead to a repeat of the Greek debt crisis, “we have to prevent Italy from being able to get special treatment here that, if everybody were to get it, would mean the end of the euro.”
The budget law has to be submitted to the European Commission by October 15 and to Italy’s parliament by October 20, and must be approved before the year ends. The European Commission can identify violations of fiscal rules and demand a new draft. However, since 2013, when the European Commission received the power to vet draft budgets, it has never rejected a draft. It has labeled some “at risk of non-compliance” or “at serious risk of non-compliance” and negotiated with governments. Politico predicts that punishing Italy, whether via budget rejection or with fines, could legitimize rhetoric from Di Maio and Salvini that accuses the EU of bureaucratic overreach.
At a meeting of finance ministers and EU economic commissioners in Luxembourg on October 1, Tria suggested that the details of the draft budget were not final, but he declined questions about reversing the deficit increase.