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Italy on collision course with EU over deficit

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Italy on collision course with EU over deficit
FILE PHOTO: Italian Interior Minister Matteo Salvini speaks during a meeting with Hungarian Prime Minister Viktor Orban in Milan, Italy, August 28, 2018. REUTERS/Massimo Pinca   -   Copyright  MASSIMO PINCA(Reuters)
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By Steve Scherer

ROME (Reuters) – The leaders of the parties in Italy’s coalition government have signalled they will seek leeway for deficit spending next year, putting it on a collision course with the European Commission and investors.

After Fitch cut the outlook on Italy’s debt rating on Friday, neither Matteo Salvini nor Luigi Di Maio – the heads of the League and 5-Star Movement respectively – backed away from campaign promises to cut taxes and boost welfare spending.

On Monday, Salvini said he wanted to increase spending, but not exceed the EU budget deficit limit of 3 percent of gross domestic product. Di Maio on Sunday stuck to his party’s campaign pledge to introduce a universal income for the poor.

“We can’t think about listening to the ratings agencies and reassuring the markets, and then stab Italians in the back,” Di Maio said. “We’ll always choose Italians first”.

Italy must disclose its growth and budget targets for next year by Sept. 27.

Italy’s populist government took office in June after promising it would go on a spending spree to lift economic growth and create jobs. That has put the country’s debt, the third-biggest debt in the world, in the market spotlight.

Since mid-May, when the coalition published its programme, the gap between the Italian benchmark 10-year bonds and the safer German equivalent has more than doubled to 285 basis points.

Last year, the Commission gave the previous government spending leeway ahead of the national election. But next year the Commission has said Italy must reduce debt.

“It’s in Italy’s interest to control public debt,” Economic and Monetary Affairs Commissioner, Pierre Moscovici, said last week.

The previous government targeted a budget deficit of 1.6 percent of GDP in 2018 and 0.8 percent in 2019.

Economy Minister Giovanni Tria, an economics professor and not a member of either of the governing parties, has taken a more moderate line than the party leaders.

Over the weekend, Tria promised to respect EU commitments and said bond yields would settle after the government provided its budget intentions over the next two months.

Tria said last month that next year’s deficit, without introducing any new measures, would be around 1.2 percent of GDP.

He is considering fixing the 2019 deficit target at about 2.0 percent of GDP and making a small cut to debt, Corriere della Sera newspaper reported on Monday.

On top of the universal income, the coalition government has said it wants to slash taxes, partly roll back a 2011 pension reform, head off an automatic VAT hike next year, and increase investments in public works.

But recent data have indicated that Italy’s economy, the euro zone’s third biggest, is slowing this year, further reducing the government’s room to manoeuvre.

Growth in Italian manufacturing slowed in August to the lowest rate in two years, a survey showed on Monday.

(Reporting by Steve Scherer, writing by Francesca Landini, editing by Larry King)

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