Italy moves to appease markets by committing to 1.7% budget deficit

Luigi Di Maioattends the forum 'The Today and Tomorrow's Competitive Strategies' organized by 'The European House - Ambrosetti' at Villa d'Este in Cernobbio, Italy, 03 September 2017. EPA-EFE/MATTEO BAZZI

Italy moves to appease markets by committing to 1.7% budget deficit


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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.

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