Italy’s deputy prime minister Luigi Di Maio moved to appease markets on Monday.
Di Maio affirmed a commitment to a 1,.% budget deficit that is well in line with the EU’s fiscal compact.
EU rules prohibit a fiscal deficit in excess of 3% of the GDP, especially for Italy, which has a 131% debt-to-GDP ratio that is second only to Greece.
The projected 2019 budget deficit target is approximately double the projected 2018 deficit, which stands at 0,8%.
Speaking in parliament, the Leader of 5-Star Movement sought to put to rest increasing concerns that Italy may face a major debt refinancing crisis due to perceived political risk. Italian bond yields have been rising despite an ongoing bond-buying program by the European Central Bank.
In an interview with Corriere della Sera published on Monday, Di Maio spoke in more combative terms, suggesting that the opposition hopes in a market “attack” against the government, warning that Italy “cannot be threatened.”
Surging bond yields could trigger a debt refinancing crisis for the third biggest economy in the Eurozone.
Markets are reacting to promises by the Italian government for increased welfare spending and a drastic reduction in taxes. On Saturday, prime minister Giuseppe Conte confirmed that Italy will move to slush corporate tax to two flat rates of 15% and 20% and guarantee a minimum income of 780 Euros to every Italian. Previous statements have also made clear that Italy will withdraw a planned VAT hike.
The Italian government believes that these measures will not undermine the budget deficit target as loss of revenue and increased spending will be compensated by faster growth.