Italy approves budget meeting EU demands for €3.4bn in extra deficit cuts

Italy has moved to avoid punishment from Brussels over its public finances, as the centre-left government led by Paolo Gentiloni approved €3.4bn in extra budget-deficit cuts in a bid to meet EU demands.

The announcement came after a two-hour cabinet meeting on Tuesday, during which Italy also approved its annual economic planning document, forecasting a small increase in its growth rate from 0.9 per cent this year to 1.1 per cent in 2018.

The matter of the €3.4bn in extra deficit reduction had been hanging over Mr Gentiloni’s government almost since he took over from Matteo Renzi as Italian prime minister last December.

In February, Valdis Dombrovskis, vice-president of the European commission in charge of eurozone issues, had said “there would be a case to open an excessive deficit procedure for Italy” if it did not approve the cuts by the end of April.

After a fairly lengthy internal debate over the terms the correction, including pushback from some lawmakers who argued Brussels should be ignored, Italy finally obliged – though the EU will still want to examine the details.

“This delivers a message of strong reassurance: our accounts are in order, and not because of higher taxes,” Mr Gentiloni said at a press conference in Rome. Pier Carlo Padoan, the finance minister, said the extra cuts would come from greater efficiency in tax collection and a boost to efforts to fight tax evasion, as well as some spending reductions.

Italy runs a budget deficit that is well below the 3 per cent upper limit set by the EU, and this year Mr Padoan said it was expected to be 2.1 per cent of GDP. But the eurozone’s third-largest economy has a history of flouting other EU rules related to countries with high debt levels. Italy’s currently sits at about 133 per cent of GDP.

Italy has stabilised its debt-to-GDP ratio, but has delayed bringing it down as promised in recent years and has also failed to reduce its annual deficits as quickly as planned.

Italy’s move to accept the need for extra budget cuts does not mean that its fiscal problems with Brussels are resolved. In the autumn, probably before the next general election due in February 2018, Mr Gentiloni will have to present a budget with very little room for fiscal expansion.

He is likely to come under pressure from members of the ruling centre-left Democratic party to take a defiant stand towards the EU and propose a package that is more politically appealing to Italians hit by years of economic crisis and a sluggish recovery.

There have already been signs of tension between rank-and-file members of the parliamentary majority and Mr Padoan over the scale of privatisation, and reforms of the land registry. But Mr Gentiloni said on Tuesday his economic plan would be far from “depressionary”.

Meanwhile Mr Padoan insisted that Italy would continue to move ahead with structural economic reforms, including a new competition law and overhauls of the civil justice and public administration – an attempt to extend the stunted reformist agenda pushed by Mr Renzi.