Italy’s populist government has come to an agreement over spending as it tries to “end poverty” with its first budget.
The ruling Five Star and League parties said late on Thursday that they had agreed to set the budget deficit at 2.4% of GDP. They will press ahead with a minimum income for the unemployed.
The decision defies Brussels’ demand for Italy to rein in its debt.
It is also a defeat for technocrat economy minister Giovanni Tria, who was pushing for lower spending.
Mr Tria was seeking to limit the budget deficit to below 2% of GDP, to avoid adding to Italy’s €2.3tn ($2.7tn; £2tn) debt.
But his political colleagues wanted to free up more money in order to fulfil election promises, which include a basic income, tax cuts and scrapping planned higher retirement ages.
The overnight news hit Italian borrowing costs early on Friday and there were reports that Italy’s president had urged Mr Tria not to resign. All eyes were on the “spread” – the gap between Italian and German bond yields – which was expected to increase on Friday.
How is Italy defying the EU?
The budget decision is well short of the EU’s deficit limit of 3% of GDP.
But Italy had promised to cut its debt decisively. The debt stands at 131% of national output. While Italy has the third biggest economy in the eurozone, it is second only to Greece in terms of the scale of its debt.
Before the populist parties came to power this year, the centre-left government was aiming for a 0.8% budget deficit with a view to balancing its books by 2020.
By appointing a technocrat as finance minister, the League and Five Star had sought to reassure both the financial markets and Brussels.
The 2.4% budget deficit is set for 2019 and the following two years as well.
League leader Matteo Salvini has questioned why Italy should be shackled by European limits, hampering what he sees as vital reform projects.
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What are the populists promising?
They swept to power pledging a series of tax cuts, new social welfare policies and better pensions – all expensive programmes. A minimum basic income for the unemployed is set to cost €10bn alone.
“We, in a decisive manner, with this budget law, will have abolished poverty,” Luigi Di Maio, deputy prime minister and leader of the Five Star party, said ahead of Thursday’s crunch meeting.
The plans must be approved by the parliament in October.
Among the ambitious plans at election time were:
- A guaranteed basic income for poor families of about €780 a month
- Tax reform for rates of just 15% and 20%, down from 23%-43%, which could cost up to €50bn
- Abolishing plans to raise retirement age over several years, and setting minimum pensions
What will Tria do next?
Mr Tria, who has to implement the budget, is an independent economist. He was appointed as part of the complicated negotiations to form the government (in which the prime minister, Giuseppe Conte, is also an independent).
He believes the debt ratio should be far below the EU 3% limit – initially proposing just 1.6%, which would have somewhat crippled the government’s big spending plans.