To keep up its promise of reducing poverty in the country, Italy’s populist government has agreed to fix the nation’s budget deficit at 2.4% of GDP and will move ahead with a minimum income plan for the unemployed. Italy is presently ruled by a coalition of Five Star and League parties which is determined to end poverty with its first budget. The decision is against Brussels’ demand asking Italy to rein in public spending and its own economic minister Giovanni Tria who was insisting on lower spending. Mr. Tria was pushing to keep the budget deficit below 2% of GDP to avoid increasing the nation’s debt of $2.7 trillion but his colleagues were more determined to fulfill election promises.
This decision has led to strong criticism from the Economic Union Commissioner Pierre Moscovici and there are reports that party leader Luigi Di Maio had to request Mr. Tria to not resign in protest. He said that party had to fulfill election promises of tax cuts, fix basic income and also scrap proposal of setting up high retirement age. The news of this budget deficit has caused dramatic changes in Italy’s stock exchange which fell by more than 2% and stocks of banks fell by 5% while yield from 10 year government bonds rose by 3 percent.
Though Italy’s budget deficit is way below EU deficit limit of 3% GDP, the announcement led to widening gap between yields from Italian and German bonds which reached its highest limit since three weeks. Before the current government came into power, the previous govt. had plans of keeping the budget low by having a deficit of 0.8% of GDP and clearing out its foreign debt by 2020. Mr. Moscovici stated that as Italy had decided to give importance to populists’ demands over market situation the EU too would just wait and watch instead of stepping into the crisis.