Italy's Budget Talks Start as Investors Serve Up Warning

(Bloomberg) -- Italy's government fired the opening salvo in what promises to be a fractious period of negotiations ahead of the 2019 budget, in a high-stakes process that's already sparking investor concern.

As budget talks began in Rome on Friday, the two parties in the ruling coalition pledged to start implementing their bold spending plans next year, risking putting Premier Giuseppe Conte's cabinet on a collision course with European Union partners. A spike in the yield of Italy's 2.3-trillion-euro ($2.7 trillion) public debt on Friday showed how closely markets will be following the talks.

The budget discussions will be key to gauging whether Finance Minister Giovanni Tria -- a university professor with no previous political experience -- will be able to withstand pressure from Conte's political sponsors to deliver on their electoral promises. Tria has pledged to keep the deficit within the EU's limit of 3 percent of gross domestic product.

“We have agreed on the economic and financial planning that will be presented in September,” Conte said in a statement after meeting with Tria, Deputy Premier and Five Star Movement leader Luigi Di Maio, Foreign Minister Enzo Moavero, Europe Minister Paolo Savona and Cabinet Undersecretary Giancarlo Giorgetti. Conte gave no details on budget figures.

Flat Tax

Cabinet Undersecretary Giancarlo Giorgetti, a representative of the League -- a partner in the ruling coalition -- who was at the meeting, said in interview with Italian daily La Stampa on Saturday that he is confident that both flat tax and citizen's income measures will be included in the budget law.

The two measures will be developed in accordance with budget balance rules and common sense, he said, ruling out that the government will choose only one of the two: “both or nothing,” he was cited as saying.

The government coalition has advocated populist economic policies that could cost over 100 billion euros ($116 billion). The Five Star leader's priority is the citizen's income proposal aimed at helping the poor, while the League wants the flat tax and limits on immigration.

The outcome of the meeting confirms that the government's spending plans are “compatible” with current budget targets, Tria said in a statement.

Treasury officials will start working on a draft budget law, as Tria proposed Friday, to finance the flat tax with a higher VAT, according to la Repubblica. A follow-up meeting is set for Aug. 8, the newspaper said on Saturday.

For more on the government program, please click here

Sweeping Measures

The government's coalition agreement calls for sweeping fiscal measures. The anti-immigration League wants tax cuts for businesses and individuals while the Five Star Movement, Italy's largest party, wants to introduce a so-called citizen's income for the poor, with spending projected to rise as much as 120 billion euros in the first full year, according to calculations by Carlo Cottarelli, a former International Monetary Fund executive who nearly became premier himself.

Italy's government is due to set new public-finance targets in late September, and to submit a draft budget to the European Union for review by October 15. The budget law will have to be finally approved by the Rome-based parliament by year-end.

“What we have to wait for is for the final proposal because in this period you will have meetings, you will have Twitter, you will have politicians saying ‘we will spend a lot',” Carlo Messina, chief executive officer of Intesa Sanpaolo SpA, said in an interview with Bloomberg Television on Friday. “We have to go back to reality, and reality is you can't make expenditure if you don't have inflows.”

In July, Tria told Bloomberg News in an interview that the government won't pass any supplementary budget adjustments this year and will stay within the deficit and debt forecasts set by the previous administration. That means a deficit of 1.6 percent of GDP and a debt ratio of 130.8 percent. Yet Di Maio confirmed on Thursday that the citizen's income draft law will be presented to parliament “shortly.”

As the government geared up for the meeting, Italian bonds suffered amid resurgent concerns about a trade war. Returns on the country's debt rose for a third day on Friday, with 10-year yields rising above 3 percent for the first time in almost two months.

“Meetings on the budget law, or even rumor of them, is clearly having an impact on Italy's bond yields,” said Vincenzo Longo, analyst at IG Markets in Milan. “This is going to be the biggest theme for Italian markets for the autumn.”

--With assistance from Jerrold Colten.

To contact the reporters on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net;Lorenzo Totaro in Rome at ltotaro@bloomberg.net;Chiara Albanese in Rome at calbanese10@bloomberg.net;Sonia Sirletti in Milan at ssirletti@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Steve Geimann, Stefania Bianchi