Italy’s populist government has come to an agreement over spending as it tries to “end poverty” with its first budget.
A joint statement from Five Star and the League late on Thursday said they had agreed to set the budget deficit at 2.4% of GDP – defying Brussels.
It comes after the administration was said to have clashed with its economy minister, technocrat Giovanni Tria.
Mr Tria was understood to have wanted to stick to lower spending to avoid adding to Italy’s €2.3tn (£2tn) debt.
But his political colleagues wanted to free up more money in order to fulfil their election promises, which included a guaranteed minimum income for the poor.
“We, in a decisive manner, with this budget law, will have abolished poverty,” Luigi Di Maio, deputy prime minister and leader of the Five Star party, said ahead of Thursday’s crunch meeting.
But the coalition government’s ambitious spending plans had put the government in conflict with European powers, who, like Mr Tria, want Italy to stick to lower spending.
Mr Tria, a university professor not affiliated with either party, was previously understood to have wanted to set spending at about 1.6% of debt above GDP – even lower than the 3% limit imposed by the European Union.
But Italy had promised to cut its deficit decisively, and so Thursday evening’s announcement may put them further at odds with the EU.
Now the plans have been decided, they must be approved by the parliament in October.
What have the populists promised?
Italy’s populist government needs to fulfil campaign promises and appease its voters while balancing its books.
Five Star and the League swept to power promising a series of tax cuts, new social welfare policies and better pensions – all expensive programmes.
Among the ambitious plans at election time were:
- A guaranteed basic income for poor families of about €780 (£695) a month – at a projected cost of €17bn (£15bn)
- Tax reform for rates of just 15% and 20%, down from 23%-43%, which could cost up to €50bn (£45bn)
- Abolishing plans to raise retirement age over several years, and setting minimum pensions
What’s the problem?
Italy is bound by European fiscal responsibility rules, preventing its government from clocking up too much debt compared to its economic output in any one year. This is measured by the budget deficit to GDP ratio – and is set at 3%.
The rule, handed down from the European Commission, is supposed to ensure the collective stability of EU countries. Historically, it has often been broken – but has been watched more closely since the 2008 global financial crisis.
That leaves the joint populist leaders Matteo Salvini, of the League party, and Mr Di Maio with unwelcome limits on what they can spend to reach their lofty goals.
- Italy populists take power: What comes next?
- What exactly is populism?
Mr Salvini has questioned why Italy should be shackled by European limits, hampering what he sees as vital reform projects.
And on the European side, the 3% spending limit is seen as just that – a limit, not a target. Many EU finance experts believe Italy should be targeting much lower figures, and Italy has been under intense pressure from Europe to do so.
A voice of dissent
To make matters worse, there were strong voices within their own government calling for even less spending.
Mr Tria, who is writing the budget, is an independent economist. He was appointed as part of the complicated negotiations to form the government (in which the prime minister, Giuseppe Conte, is also an independent).
And Mr Tria believes the debt ratio should be far below the EU 3% limit – initially proposing just 1.6%, somewhat crippling the government’s big spending plans.
That’s because Italy’s economy, the third largest in the Eurozone, already comes saddled with huge debts.
In raw numbers, it tops the table with €2.3tn, and when adjusted for the size of the economy, it comes second only to Greece.