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Italy's populists agree budget to 'abolish poverty' Italy's populists agree budget to 'abolish poverty'
(about 11 hours later)
Italy's populist government has come to an agreement over spending as it tries to "end poverty" with its first budget.Italy's populist government has come to an agreement over spending as it tries to "end poverty" with its first budget.
A joint statement from Five Star and the League late on Thursday said they had agreed to set the budget deficit at 2.4% of GDP - defying Brussels. The ruling Five Star and League parties said late on Thursday that they had agreed to set the budget deficit at 2.4% of GDP. They will press ahead with a minimum income for the unemployed.
It comes after the administration was said to have clashed with its economy minister, technocrat Giovanni Tria. The decision defies Brussels' demand for Italy to rein in its debt.
Mr Tria was understood to have wanted to stick to lower spending to avoid adding to Italy's €2.3tn (£2tn) debt. It is also a defeat for technocrat economy minister Giovanni Tria, who was pushing for lower spending.
But his political colleagues wanted to free up more money in order to fulfil their election promises, which included a guaranteed minimum income for the poor. Mr Tria was seeking to limit the budget deficit to below 2% of GDP, to avoid adding to Italy's €2.3tn ($2.7tn; £2tn) debt.
But his political colleagues wanted to free up more money in order to fulfil election promises, which include a basic income, tax cuts and scrapping planned higher retirement ages.
The overnight news hit Italian borrowing costs early on Friday and there were reports that Italy's president had urged Mr Tria not to resign. All eyes were on the "spread" - the gap between Italian and German bond yields - which was expected to increase on Friday.
How is Italy defying the EU?
The budget decision is well short of the EU's deficit limit of 3% of GDP.
But Italy, the third biggest economy in the eurozone, had promised to cut its debt decisively. The debt stands at 131% of national output, second only to Greece.
Before the populist parties came to power this year, the centre-left government was aiming for a 0.8% budget deficit with a view to balancing its books by 2020.
By appointing a technocrat as finance minister, the League and Five Star had sought to reassure both the financial markets and Brussels.
The 2.4% budget deficit is set for 2019 and the following two years as well.
League leader Matteo Salvini has questioned why Italy should be shackled by European limits, hampering what he sees as vital reform projects.
What are the populists promising?
They swept to power pledging a series of tax cuts, new social welfare policies and better pensions - all expensive programmes. A minimum basic income for the unemployed is set to cost €10bn alone.
"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 ahead of Thursday's crunch meeting."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 ahead of Thursday's crunch meeting.
But the coalition government's ambitious spending plans had put the government in conflict with European powers, who, like Mr Tria, want Italy to stick to lower spending. The plans must be approved by the parliament in October.
Mr Tria, a university professor not affiliated with either party, was previously understood to have wanted to set spending at about 1.6% of debt above GDP - even lower than the 3% limit imposed by the European Union.
But Italy had promised to cut its deficit decisively, and so Thursday evening's announcement may put them further at odds with the EU.
Now the plans have been decided, they must be approved by the parliament in October.
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:Among the ambitious plans at election time were:
What's the problem? What will Tria do next?
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 budget deficit to GDP ratio - and is set at 3%. Mr Tria, who has to implement the budget, is an independent economist. He was appointed as part of the complicated negotiations to form the government (in which the prime minister, Giuseppe Conte, is also an independent).
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. He believes the debt ratio should be far below the EU 3% limit - initially proposing just 1.6%, which would have somewhat crippled the government's big spending plans.
That leaves the joint populist leaders Matteo Salvini, of the League party, and Mr Di Maio 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 has been under intense pressure from Europe to do so.
A voice of dissent
To make matters worse, there were strong voices within their own government calling for even less spending.
Mr Tria, who is writing the budget, is an independent economist. 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, already comes saddled with huge debts.
In raw numbers, it tops the table with €2.3tn, and when adjusted for the size of the economy, it comes second only to Greece.