By Giuseppe Fonte and Angelo Amante
ROME (Reuters) – Deputy Prime Minister Matteo Salvini tried to play down investors’ fears on Tuesday that Italy was set to shunt the budget deficit sharply higher, saying planned spending increases and tax cuts would be introduced gradually.
Investors have dumped Italian bonds in droves since the government took office in June on concerns that the coalition may implement budget plans that would put the already-huge debt pile under strain and breach EU fiscal rules.
However, Salvini sought to calm tensions after meeting senior figures from his League party to discuss economic priorities. Their various campaign promises, including watering down pension reform and introducing a flat tax, would be phased in over the course of the five-year legislature, he said.
“We will look to respect all the rules, all the constraints and all the commitments made. We can make this country grow and make Italians better off without irritating those who watch us from on high,” Salvini told reporters.
“We will try to be good and convincing.”
The coalition, which comprises the League and the anti-establishment 5-Star Movement, is due to unveil Italy’s latest economic growth and public finance targets at the end of the month, with the 2019 budget scheduled to be presented in mid-October.
Under European Union rules, no country should have a budget deficit that is higher than 3 percent of gross domestic product or debt above 60 percent of output. Italy’s debt pile amounts to more than 130 percent, the second highest in Europe after Greece, making it vulnerable to market pressure.
Economy Minister Giovanni Tria, an academic and not a member of either of the governing parties, has urged caution and is pushing to keep next year’s deficit below 2 percent of GDP, sources said on Monday.
A League source said on Tuesday that Salvini was pushing for the government to accept a deficit “a bit above” 2 percent.
The 5-Star has so far demanded a more radical approach, with its leader Luigi Di Maio saying at the weekend that he would “always choose Italians first” rather than give in to pressure from credit rating agencies or financial markets.
Nonetheless, investors took heart at Salvini’s more reassuring tones on Tuesday. Italian government bond yields fell sharply during the day, although they remained well above where they were before national elections in March.
The League and 5-Star forged an unlikely alliance following the inconclusive election, welding together their disparate economic platforms, promising both generous tax cuts and a significant increase in welfare for the unemployed.
Analysts have warned that if their proposals are fully implemented, Italy’s debt will balloon to unsustainable heights.
(Writing by Crispian Balmer; editing by David Stamp)