Italy Cuts 2019 Deficit Goal to 2% in Bid to Avoid EU Censure

(Bloomberg) -- Italy's populist government lowered its 2019 budget deficit in a bid to avoid European Union sanctions for failing to rein in debt, pushing bond yields to the lowest in a year.

The deficit is now expected to be 2.04% of economic output, according to a person familiar with the issue who asked not to be identified. A draft budget in April envisaged a shortfall of 2.4%.

Italian bonds rallied for a fifth day, with 10-year yields dropping five basis points to 1.91% while two-year borrowing costs fell below zero. The 10-year spread over German bunds, a key gauge of risk in the country, fell to 227 basis points, the lowest level since September, when the nation's budget plans started to roil markets.

Ministers meeting in Rome on Monday agreed that deficit would fall by 7.6 billion euros ($8.6 billion) this year, the Finance Ministry said in a statement. That's due to higher revenues and lower spending, including 1.5 billion euros previously set aside for social programs in which demand has been lower than expected.

This means Italy's structural deficit -- a measure stripping out temporary measures and effects that the EU uses to assess a country's fiscal discipline -- will improve by 0.3 percentage points in 2019, compared to a previous estimate of 0.2 percentage points deterioration.

Rome faces the risk of a multibillion-euro fine from the infringement procedure, but Prime Minister Giuseppe Conte's government intends to use the lower 2019 deficit as a goodwill gesture to the Brussels-based Commission. It remains to be seen whether that will be enough to convince the Commission, which is set to meet later this week to decide whether to propose opening the disciplinary action.

The ministry said the measures mean an infringement procedure is “unjustified.”

The budget maneuver has led to widespread confidence within the government that the Commission will stop short of taking action, Italian media reported on Tuesday.

The 2020 deficit will be in line with previous targets, the person said, or 2.1% of gross domestic product.

The EU's executive arm was supposed to discuss Italy on Tuesday but the meeting has been postponed after leaders failed to decide on a roster of candidates for the union's top jobs and adjourned talks. At stake is who will succeed Jean-Claude Juncker as Commission president and other top positions, including Mario Draghi's successor at the European Central Bank

Dutch Prime Minister Mark Rutte told Bloomberg Television last week that there's no evidence Italy is doing enough to deserve escaping a sanction. “The commission has to intervene,” he said.

The commission and Rome take a different view of what Italy's public finances will look like over the next couple years. Italy forecasts the structural deficit will narrow to 1.4% of GDP in 2020 from 1.5% in 2019, while the EU executive arm sees it widening to 3.6% if the government isn't able to avoid an VAT increase by raising revenue or cutting spending.

Salvini Demands the Right to Roll the Dice on Italy and the Euro

Deputy premier Matteo Salvini, the strongman leader of the right-wing League, is pushing to adopt a flat-tax plan in 2020 that could cost as much as 15 billion euros ($17 billion).

--With assistance from John Ainger.

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Ross Larsen, Dan Liefgreen

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