(Bloomberg) -- Prime Minister Giuseppe Conte forged a deal with populist leaders to submit a revised budget proposal to the European Commission, in a bid to avert fines against Italy.
Conte’s euroskeptic deputies Matteo Salvini and Luigi Di Maio have most of the political power in the administration and had long resisted attempts to placate the commission. But at talks running late into Sunday night, they agreed on a new package to send to Brussels, government officials said.
The new plan confirms the 2019 deficit target will be lowered to 2.04 percent of GDP from 2.4 percent -- as Conte flagged to Brussels last week. The government has identified about 3 billion euros ($3.4 billion) of additional funds and lowered the projected cost of new welfare payments to 7.1 billion euros from 9 billion euros.
“We’ve reached agreement on everything,” Salvini said, adding the budget would be “within limits that should please the EU.” Di Maio said there was no change or delay to a citizen’s income for the poor, nor to a lower retirement age -- the pledges he and Salvini have fought hardest for -- in the new budget, according to a report from Ansa news wire. He said tax cuts were also included.
The European Commission could possibly accept a deficit of 2.04 percent, so long as the policy details are rigorous enough and the economic assumptions are reasonable, a European Union official said. Italy has signaled that going below 2 percent is a red line for the coalition, the official added, asking not to be named, as the matter is sensitive.
Italian bonds fell slightly in early trading with the 10-year yield spread over German bunds narrowing by 2 basis points to 266 basis points, the lowest since September. The gauge, which measures political risk, reached a five-year high of 327 basis points last month.
Giovanni Tria, the more conciliatory finance minister, was also at the meeting which produced an agreement to limit a so-called ecotax on auto purchases to Porsches, luxury models and SUVs, according to an official from Salvini’s League party who asked not to be named.
‘Golden Pensions’
The government also agreed on cuts to so-called “golden pensions,” the largest pension packages, and on speeding up payments owed by the public administration to businesses, according to Conte’s office.
Di Maio and Salvini, who’ve in the past locked horns on budget details, are in total accord on the figures now, the League official said, denying tensions in the government and a report in newspaper Corriere della Sera that Conte could resign.
The showdown over spending in the euro area’s second-most-indebted nation was triggered by March elections that brought the government to power on promises to provide a “citizen’s income” for the poor, tax cuts and a lower retirement age. The clock is ticking for Italy with senior commission officials set to meet Wednesday, when they could decide whether the budget merits the start of a disciplinary process leading to possible fines.
“It remains to be seen whether the new deficit forecast will be enough to bring the dispute with the EU to an end,” Jack Allen, senior European economist at Capital Economics, wrote in a Dec. 13 note based on Conte’s initial proposal.
Conte wants to submit changes to the existing budget legislation to the Italian Senate on Tuesday or Wednesday, so he can obtain final approval by parliament by the end of the year.
(Updates with EU view in fifth paragraph.)
