Rome: Italian Prime Minister Matteo Renzi presented an expansionary, tax-cutting 2015 budget on Wednesday, ignoring the concerns of the European Commission which says Rome is not doing enough to rein in its huge public debt.

The budget, approved after an evening cabinet meeting, lowers taxes by 18 billion euros ($23.07 billion), the 39-year-old former mayor of Florence told reporters, describing it as “the biggest tax cut in the history of our republic.” The package will now be sent to the European Commission for scrutiny and EU sources have told Reuters it may be rejected for failing to respect recommendations on deficit and debt reduction.

Illustrating his first budget since taking office in February, Renzi acknowledged there may be problems with the Commission but defended his position with his usual verve.

“This is something very, very, very new, a budget which tries to be expansionary, which is anti-cyclical in a moment of difficulty which we are all aware of,” Renzi said.

Italy, the Eurozone’s most chronically sluggish economy, is forecasting economic output to fall 0.3 per cent this year, the third consecutive year of contraction, before rising a meagre 0.6 per cent in 2015. It has not posted a single quarter of growth in the last three years.

In that time its public debt has risen steadily to a record high above 130 per cent of national output, the highest in the Eurozone after Greece.

The Commission wants Italy to reduce borrowing in order to rein in the debt, but Renzi insists that the debt situation is only exacerbated by continued fiscal tightening.

The tensions play into a wider debate about the future of the Eurozone’s budget rules, with France and Italy pushing for changes to allow more spending, Germany insisting on maintaining fiscal discipline, and the Commission caught in the middle.

Turmoil on Wednesday among markets frightened by global growth worries saw a plunge in Italian stocks and government bonds along with those of other peripheral Eurozone countries.

The sell-off was a reminder of Italy’s vulnerability and conjured uneasy memories of the region’s debt crisis in 2011 and 2012, when the Eurozone’s third-largest economy teetered on the brink of bankruptcy.

Renzi dismissed reporters’ suggestions that Italy was being punished again for a lack of fiscal discipline.

“We are obstinately convinced the collapse of the markets has nothing to do with our budget,” he said. Economy Minister Pier Carlo Padoan, speaking at the same news conference, said markets were “re-pricing after a period of excessive euphoria.” Renzi said Italy had sent a letter to the Commission explaining why he was convinced that economic circumstances and his government’s reform efforts justified a waiving of the EU’s normal rules on debt reduction.

“PREPARED FOR WORST” Before the cabinet meeting, one of his closest economic advisers, Filippo Taddei, told Reuters Rome could adjust its budget if it was rejected by the Commission.

“We have good arguments, but we are prepared for the worst,” said Taddei, economic spokesman for Renzi’s Democratic Party.

France, which has reneged on previous promises to cut its deficit, sent its own budget to the Commission on Wednesday, and EU sources have told Reuters it also risks being rejected.

France’s position is widely considered to be weaker than Italy’s because, although it has a lower public debt, its budget deficit is above the EU’s 3 per cent of gross domestic product ceiling, while Italy’s is just inside it.

Data on Wednesday indicated how little room for manoeuvre Renzi has, with data for the first half of the year showing a budget deficit of 3.8 per cent of GDP..

As well as confirming an income-tax cut for low earners adopted in April, the budget cuts a regional company tax, IRAP, and scraps social contributions for new hires on open-ended contracts.

Renzi also announced extra borrowing of 11 billion euros next year and said the expansion would be partly offset by 15 billion euros of spending curbs on central and local government and almost 4 billion euros from measures to tackle tax evasion.

He gave little detail about the spending cuts.

The dispute with Brussels revolves around the technical issue of Italy’s “structural” deficit, adjusted for the business cycle and one-off factors — which Italy is proposing to reduce by just 0.1 per cent of GDP.

The Commission wants a much bigger cut of “at least 0.7 per cent,” an EU source told Reuters on Tuesday.

If neither side budges, then Renzi, the Commission and Eurozone governments are likely to open lengthy negotiations before the Commission delivers its final verdict later this year.