(Bloomberg) -- Italy’s populist government lowered its 2019 budget deficit in a bid to comply with European Union rules and avoid sanctions for failing to rein in debt.
Italy’s deficit is now expected to be 2.04% of economic output, according to a person familiar with the issue who asked not to be identified. This is lower than the 2.4% envisaged in an April draft budget.
Ministers meeting in Rome on Monday agreed that deficit would fall by 7.6 billion euros ($8.6 billion) this year, the Finance Ministry said in a statement. That’s due to higher revenues and lower spending, including 1.5 billion euros previously set aside for social programs in which demand has been lower than expected.
This means Italy’s structural deficit -- a measure stripping out temporary measures and effects that the EU uses to assess a country’s fiscal discipline -- will improve by 0.3 percentage points in 2019, compared to a previous estimate of 0.2 percentage points deterioration.
Rome faces the risk of a multibillion-euro fine from the infringement procedure but prime minister Giuseppe Conte’s government intends to use the lower 2019 deficit as a goodwill gesture to the Brussels-based commission. It remains to be seen whether that will be enough to convince the Commission, which is set to meet later this week to decide whether to propose opening the disciplinary action.
“The government considers the public finance framework largely compliant” with EU rules, the ministry statement said. “The measures put in place create the conditions to make opening an infringement procedure for excessive deficit against Italy unjustified.”
The 2020 deficit will be in line with previous targets, the person said, or 2.1% of gross domestic product.
The EU’s executive arm was supposed to discuss Italy on Tuesday but the meeting has been postponed after leaders failed to decide on a roster of candidates for the union’s top jobs and adjourned their talks. At stake is who will succeed Jean-Claude Juncker as Commission president and other top positions, including Mario Draghi’s successor at the European Central Bank
Dutch Prime Minister Mark Rutte said last week in an interview with Bloomberg Television that there’s no evidence Italy is doing enough to deserve escaping a sanction. “Italy really has to do more and the commission has to intervene,” he said.
Investors are increasingly confident that Italy will avoid punishment from the EU. Earlier on Monday, Italian bonds surged with the 10-year yield falling to below the level reached in May last year when the populist government was formed.
The commission and Rome take a different view of what Italy’s public finances will look like over the next couple years. Italy forecasts the structural deficit will narrow to 1.4% of GDP in 2020 from 1.5% in 2019, while the EU executive arm sees it widening to 3.6% if the government isn’t able to avoid an VAT increase by raising revenue or cutting spending.
Deputy premier Matteo Salvini, the strongman leader of the right-wing League, is pushing to adopt a flat-tax plan in 2020 that could cost as much as 15 billion euros ($17 billion).