Italy government agrees on deficit of 2.4% of GDP in 2019

[MILAN] Italy's populist government agreed on Thursday on a deficit of 2.4 per cent of gross domestic product in 2019 in a move which risks angering Brussels and spooking the financial markets.

"We're satisfied, this is the budget of change," joint deputy prime ministers Matteo Salvini and Luigi Di Miao said in a statement after securing a last-minute victory over the country's more cautious finance minister.

The figure, vastly higher than the 0.8 per cent forecast by the previous, centre-left government, will inflate the country's already mammoth debt burden - currently 131 per cent of GDP, the biggest in the eurozone after Greece.

The decision follows weeks of suspense over whether Western Europe's first anti-establishment leadership would defy Brussels with its first budget to uphold its costly electoral promises.

Economy minister Giovanni Tria, an independent, had attempted to set an upper limit of 1.6 per cent but was forced to back down. His capitulation came just hours after rumours he would be forced to resign if he refused to play ball.

'HISTORIC DAY'

"Today is a historic day! Today Italy changes! For the first time the state is on the people's side. For the first time it is not taking away, but giving," Mr Di Maio said in a message on Facebook.

He had previously said his anti-establishment Five Star Movement would not support the budget unless the finance ministry finds the money for projects, including a basic income grant promised in March elections.

The deputy prime minister said there were 10 billion euros (S$15.7 billion) earmarked for the income in the budget, which "for the first time in the history of this country will eradicate poverty".

The basic income of 780 euros for the unemployed and those living on low wages was the Five Star Movement's key election pledge.

Mr Di Maio had repeatedly railed against the EU's budgetary restrictions, initially insisting it could do no harm to go over the 3.0-per cent threshold set by Brussels.

An audio message in which the prime minister's chief spokesman threatened to "eliminate a tide" of treasury officials unless they find the money for the promised projects has already caused a political storm.

GROWTH WOES

The big spending may unnerve investors and drive up the spread between the German and Italian bond yields, which rose above 300 points in May amid concerns over a eurosceptic government taking power.

The higher the yield, the more expensive it is for the state to borrow money, reducing its financial margins for manoeuvre.

The situation is made more complicated by a lacklustre growth forecast: just 1.0 per cent in 2019 according to the Bank of Italy and the International Monetary Fund (IMF), and 1.1 per cent according to the European Commission.

AFP