(Bloomberg) -- Italy’s fractious populist coalition has clashed on issues ranging from immigration controls to regional autonomy in its first year of governing. It shouldn’t come as a surprise that Italy’s response to the European Commission’s concerns about controlling debt also sparked tension.
Finance Minister Giovanni Tria’s letter, released late Friday, required Prime Minister Giuseppe Conte’s mediation after the anti-establishment Five Star Movement objected to a reference to a welfare-spending cut, according to Deputy Finance Minister Laura Castelli of Five Star.
“I am glad that Prime Minister Giuseppe Conte decided to review parts of the letter that we could not possibly back such as a reduction in the spending for welfare,” Castelli said in a statement.
Tria told the Commission in the letter that the government will start a review of both the nation’s tax system and public spending, in a bid to avoid an infringement procedure for failing to reduce its heavy public debt load. The letter didn’t give details about possible spending reductions.
“The government is setting up a comprehensive program to review the current spending” before preparation of the 2020 budget law, Tria said in the letter to the EU’s Brussels-based executive. The program will also review the nation’s revenue including taxes, Tria said.
In a letter sent to Tria on Wednesday, the commission had pressured the government in Rome to provide an explanation for its failure to cut the debt load in 2018 and asked how it planned to reduce it in the future.
That was the first step in a procedure that may eventually lead to a multibillion-euro fine. It also marked yet another chapter in Italy’s long-running budget tussle with Brussels, which already roiled markets at the end of 2018.
The call for an urgent intervention clashes with the view of Italy’s government, which favors higher spending and tax cuts to stimulate the economy and rein in debt by boosting revenue.
Deputy Prime Minister Matteo Salvini, head of the right-wing League, said he’s not concerned about the Commission’s action. “There are positive signals for the Italian economy and I’m convinced that Europe will respect our will to grow and cut taxes,” news agency Ansa cited him as saying at an event Saturday in the southern city of Potenza.
Salvini has the upper hand in the coalition following the League’s victory in the European elections and the poor performance by his governing partner Luigi Di Maio, leader of the Five Star. Bloomberg News reported May 30 that Salvini told his party that he wants to keep the government going but is ready to see it collapse if he can’t push through its flat tax plans and other priorities.
The yield differential between Italian and German 10-year bonds is widening again because of continuing political tension, Deputy Finance Minister Massimo Garavaglia of the League told SkyTg24 in an interview Saturday. “It was said after the elections: Let’s stop making noise and get down to work. But if we look at what happened yesterday with the letter, there would be much to discuss.”
For his part, Di Maio reportedly told staff members on Friday that ending their alliance with the League might be beneficial for his party, daily la Repubblica reported. ``The passage in the letter to the EU that called for cuts to social welfare spending was removed,'' Di Maio wrote on his blog Saturday. ``The only things to cut are taxes.''
The Italian “economy’s performance and tax revenue have so far exceeded” the government’s estimates for 2019, Tria said in the letter. “As a consequence, the deficit should be lower” than the Commission’s estimates, he added. The minister also said a budget tightening would be counterproductive for the Italian economy at present.
Earlier on Friday, Bank of Italy Governor Ignazio Visco said the debt ratio will probably rise more than the government anticipates as it relies on an ambitious goal of 18 billion euros ($20 billion) from privatizations.
Italy’s debt ratio rose to 132.2% in 2018 and under the government’s current plan, should equal 132.6% of GDP this year and 131.3% in 2020.
(Updates with comments from deputy finance minister in 11th paragraph.)
--With assistance from Jerrold Colten, Virginia Van Natta and John Follain.
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