October 3, 2019 / 2:33 PM / in 5 months

Italy to unblock frozen funds, pushing up 2019 deficit

ROME (Reuters) - Italy has lifted a block on 2019 spending that was agreed by the previous government with the European Commission, in a surprise move that will result in a higher deficit this year but which means the budget gap will not widen in 2020.

FILE PHOTO: Roberto Gualtieri arrives at Quirinale Presidential Palace, before being sworn in as Italy's finance minister, in Rome, Italy September 5, 2019. REUTERS/Ciro de Luca

The cabinet will formally approve 1.5 billion euros of spending for this year at a meeting later on Thursday, three government sources told Reuters this week. Most of it will be allocated to the economic ministry, but it is not known how it will be spent.

The prime minister’s office on Thursday confirmed that unblocking the funds would be discussed at the meeting.

The anti-establishment 5-Star Movement and the right-wing League agreed in July to freeze the money as part of a deal to convince Brussels to sign off on its 2019 budget and avoid disciplinary action.

Under that deal, Rome agreed to lower this year’s deficit to 2.04% of gross domestic product, down from a previous target of 2.4% and down from a ratio of 2.2% in 2018.

The new coalition of 5-Star and the centre-left Democratic Party (PD) on Monday set a deficit target of 2.2% for next year, as expected, but many analysts were surprised when it also announced this year’s goal was hiked to 2.2% from 2.04%.

The move means Rome will definitely miss its deficit target agreed with the European Commission, but it also means the deficit will remain stable in 2020, rather than rise.

It remains to be seen how this will be viewed by the Commission, which has yet to sign off on Italy’s budget plans. The new government is widely considered more pro-Europe than the previous one, contributing to improved relations with Brussels.

A senior official who asked not to be named told Reuters the upward revision for this year was due to a slowdown in growth, lower than forecast revenues and unexpected problems in a plan to sell off public real estate.

Nevertheless, if the freeze on spending had been maintained, the deficit would have remained much closer to the target agreed with Brussels.

Under the government’s latest plans, the 2020 headline deficit will remain at 2.2% of GDP for a third consecutive year.

The “structural” deficit, which is stripped of the effect of growth fluctuations and is the measure most closely watched by Brussels, will rise to 1.4% from 1.2% in 2019.

Economy Minister Roberto Gualtieri told Reuters the increase in the 2019 deficit was justified because the structural deficit would still fall by 0.3% of GDP this year.

Next year, however, it is targeted to rise by 0.1 points, in defiance of a commitment to Brussels in July that it should fall by 0.6 points.

Writing by Gavin Jones; Editing by Catherine Evans

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