Italy’s populist government has vowed to “end poverty” with its first budget plans on Thursday.
The ambitious spending plans of the government put it in conflict with European powers, who want Italy to stick to lower spending and avoid racking up new debt.
The country’s own economy minister, Giovanni Tria, agrees – but is under political pressure to approve spending.
His political superiors want to free up money to fulfil its campaign promises.
One of the big-ticket items is a guaranteed minimum income for the poor.
“We, in a decisive manner, with this budget law, will have abolished poverty,” Luigi Di Maio, deputy prime minister and leader of the Five Star party, said of his plans.
The argument is down to small numbers. Mr Tria is understood to have set a limit on spending of about 1.6% of debt above GDP.
Italy’s leaders want to increase that by a percentage point or two to help fund their populist pledges surrounding basic income, tax cuts and pensions.
If the economy minister loses his job or EU spending limits are broken, it could have a knock-on effect on markets in Italy and in Europe.
What have the populists promised?
Italy’s populist government needs to fulfil campaign promises and appease its voters while balancing its books.
Five Star and the League swept to power promising a series of tax cuts, new social welfare policies and better pensions – all expensive programmes.
Among the ambitious plans at election time were:
- A guaranteed basic income for poor families of about €780 (£695) a month – at a projected cost of €17bn (£15bn)
- Tax reform for rates of just 15% and 20%, down from 23%-43%, which could cost up to €50bn (£45bn)
- Abolishing plans to raise retirement age over several years, and setting minimum pensions
It is widely thought that implementing those pledges will push the government expenditure higher – and closer to EU spending limits.
What’s the big problem?
Italy is bound by European fiscal responsibility rules, preventing its government from clocking up too much debt compared to its economic output in any one year. This is measured by the ratio of public debt to GDP – and is set at 3%.
The rule, handed down from the European Commission, is supposed to ensure the collective stability of EU countries. Historically, it has often been broken – but has been watched more closely since the 2008 global financial crisis.
That leaves the joint populist leaders Matteo Salvini (of Five Star) and Luigi Di Maio (from the League party) with unwelcome limits on what they can spend to reach their lofty goals.
Mr Salvini has questioned why Italy should be shackled by European limits, hampering what he sees as vital reform projects.
And on the European side, the 3% spending limit is seen as just that – a limit, not a target. Many EU finance experts believe Italy should be targeting much lower figures, and Italy is under intense pressure from Europe to do so.
A voice of dissent
To make matters worse, there are strong voices within their own government calling for even less spending.
Mr Tria, who is writing the budget, is not a member of either party – he is an independent economist and university professor. He was appointed as part of the complicated negotiations to form the government (in which the prime minister, Giuseppe Conte, is also an independent).
And Mr Tria believes the debt ratio should be far below the EU 3% limit – initially proposing just 1.6%, somewhat crippling the government’s big spending plans.
That’s because Italy’s economy, the third largest in the Eurozone, also comes saddled with huge debts.
In raw numbers, it tops the table with €2.3 trillion (£2tn), and when adjusted for the size of the economy, it comes second only to Greece.
Even if Mr Salvini and Mr Di Maio respect the EU rules, they have called for spending in the region of 2%-2.5%.
On Wednesday, Mr Di Maio said there were no plans to fire the economy minister over the disagreement – but a senior figure from his own party, Riccardo Molinari, seemed to disagree in a media interview.
“If Tria is no longer in the project , we will find another Minister of Economy,” he told Rai television.