ROME (Reuters) - A clash between Italy’s ruling parties and their technocrat economy minister intensified on Thursday hours before the government was to unveil its first budget targets, sparking a sell off of state bonds on fears the minister could quit.
Some coalition voices publicly told Economy Minister Giovanni Tria he should resign if he couldn’t back their spending plans as Tria insisted the 2019 fiscal deficit should not exceed 2 percent of national output.
Prime Minister Giuseppe Conte’s office denied a newspaper report that a cabinet meeting to agree the deficit figure would be pushed back a day or two, and the meeting was finally set for 8 p.m. (1800 GMT), two hours later than originally planned.
Investors had interpreted the unsourced report in Corriere della Sera newspaper that the meeting would be delayed as a sign that Tria may indeed resign, sending bond yields sharply higher.
Tria’s office denied again on Thursday that he would quit, and Italian bonds recovered some of their early losses.
The ruling coalition made up of the anti-establishment 5-Star Movement and the right-wing League are pushing Tria, an academic not affiliated to either party, to ramp up the fiscal deficit to finance their promises of tax cuts and higher welfare spending.
“A battle is underway between us and Tria,” said a 5-Star source who asked not to be named. “Tria is holding to the 1.6 pct (of gross domestic product) deficit target and has threatened to resign. We have told him that he can go.”
“The ruling parties are in agreement,” the source added.
The chief whip for the League said Tria should leave if he could not accede to the ruling parties’ desired deficit target.
“If Tria agrees with us, then OK, but if not we’ll find another minister,” Riccardo Molinari told Reuters. He said a deficit of between 2.4 percent and 2.6 percent of GDP had been proposed and “would not be a tragedy.”
The coalition parties say the priority must be financing policies including a basic income for the poor and a reduction in the minimum retirement age, rather than meeting deficit goals previously agreed with Brussels.
Before the cabinet meeting, Conte, Tria, the ruling party leaders and other key ministers will meet to hammer out differences, 5-Star leader and Deputy Prime Minister Luigi Di Maio said.
“We are at an historic crossroads and we can’t backtrack by a centimeter,” Di Maio said on Facebook, calling on the government to remain united behind what he has dubbed the “People’s Budget.”
He said Italy’s bond yields rose on fears of political instability, not concern over the deficit, and the coalition would deliver “the structural reforms and investments needed to relaunch growth.”
Financial markets have been nervous since the government took office in June due to fears its spending plans will boost Italy’s debt, which is already the highest in the euro zone after Greece’s as a proportion of GDP - around 131 percent.
Italy’s government bonds had rallied this week on the expectation Tria could water down the coalition’s more radical proposals and keep a lid on public finances.
At its meeting, the cabinet is due to sign off on targets for economic growth, the deficit and public debt for 2018-2021, with most attention focused on the 2019 deficit goal.
Tria was now willing to accept a ratio of around 1.9 percent, government sources have said.
That would compare with a current target of 1.6 percent for this year, and would be sharply up from a 0.8 percent goal penciled in for 2019 by the previous center-left administration.
Even the coalition’s calls for a deficit of up to 2.6 percent would be well inside the 3 percent ceiling prescribed by EU rules, but Italy had promised Brussels it would cut the deficit decisively to rein in its high debt.
The targets form the framework for the 2019 budget, which must be approved by the cabinet by Oct. 20.
Tria said on Wednesday the budget would include the parties’ flagship policies, including the basic income for the poor and a lower retirement age, though it remains unclear how wide-ranging such measures will initially be and how they will be financed.
The League and 5-Star, rivals ahead of an inconclusive election in March, say they will govern together for a full five-year term and phase in most of their policies gradually.
Additional reporting by Massimiliano Di Giorgio and Giselda Vagnoni in Rome and Francesco Guarascio in Brussels, writing by Steve Scherer and Gavin Jones, Editing by Toby Chopra and Jon Boyle
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