NUSA DUA, Indonesia (Reuters) - Italy’s fiscal policy must lead to debt reduction because policies that raise debt are not good for the Italian people, European Commissioner for Economic Affairs Pierre Moscovici said before Italy sends its draft budget for scrutiny in Brussels.
Italy’s populist government is to present to the European Commission on Monday its draft budget for 2019, which assumes a deficit of 2.4 percent of gross domestic product, three times as much as foreseen by the previous government.
This means a higher structural deficit — which excludes one-offs and business cycle swings — which in turn means higher public debt in a country which already has a debt-to-GDP ratio of 133 percent, the second highest in Europe after Greece.
“I understand that the Italian government wants to implement programmes to fight poverty, for social inclusion or for investment. But this is perfectly compatible with serious public finances and is a matter of political choice,” Moscovici told Reuters in an interview.
“If debt rises, in the end, who pays? The Italian citizens. So a budget that would increase public debt would be a budget against Italian people,” he said on the sidelines of the International Monetary Fund’s annual meetings in Indonesia.
The draft Italian budget also raised concern on financial markets. Italian three-year bond yields rose to five year highs at an auction on Thursday and benchmark 10-year paper traded at 4-1/2-year highs.
Many officials are privately concerned about the possibility of Italy sparking another sovereign debt crisis like the one triggered by Greece in 2010 that nearly destroyed the euro zone. Italy’s economy is almost 10 times bigger than Greece’s.
“We don’t want a crisis, neither a political crisis nor a financial crisis. With a minimum of goodwill we can avoid bad scenarios,” Moscovici said.
But the Italian government reiterated on Thursday it would not backtrack on its 2019 budget plan regardless of mounting market concern over its financial sustainability.
“We will not take a step back. We’ll invest in jobs and economic growth,” Deputy Prime Minister Matteo Salvini said.
Moscovici struck a more conciliatory tone.
“I do not want us to be in a confrontational mood, because it leads us nowhere. Rome vs Brussels is absurd, because Italy is so close to the heart of Europe,” he said.
Moscovici said he would travel to Rome next Thursday and Friday to discuss the budget with Finance Minister Giovanni Tria and other officials to find a solution. The commission’s focus is on Italy’s structural deficit, which under the rules should fall by 0.6 percent of GDP next year, but under the current plan is to rise by 0.8 percent of GDP.
“It is clear that there might be a gap at the end of the dialogue, but we need to reduce that gap,” Moscovici said.
“We have shown a lot of flexibility to Italy and I am not talking about that anymore. Rules have to be met. You talked about markets — everybody will be watchful about the direction of the movements — whether they tend to increase the deficit or decrease it,” he said.
The draft Italian budget assumes economic growth of 1.5 percent, that is to accelerate to 1.6 percent in 2020 and slow slightly to 1.4 percent in 2021. These forecasts are seen as optimistic by euro zone officials and by the Italian Fiscal Board, an independent body set up to check budget assumptions.
“Of course the forecast on public finances is linked to the forecast on growth,” Moscovici said.
If Italy’s deficit targets do not change the Commission has the right to reject the draft budget and demand a new one — a move it has never resorted to so far.
Reporting By Jan Strupczewski; Editing by Toby Chopra