Italian Minister of Economy and Finance Giovanni Tria poses prior to the first session of the 2019 Ministerial Council Meeting (MCM) at the OECD headquarters in Paris. Image Credit: AFP

Brussels. Italy told the European Commission that the populist government in Rome will launch a review of both the nation’s tax system and public spending, in a bid to avoid an infringement procedure for failing to reduce its heavy public debt load.

“The government is setting up a comprehensive program to review the current spending” ahead of the budget law for 2020, Finance Minister Giovanni Tria said in a letter to the EU’s Brussels-based executive released by his office late on Friday. The program will also be aimed at reviewing the nation’s revenue including taxes, Tria said.

In a letter sent to Tria on Wednesday, the commission had pressured the government in Rome to provide an explanation for its failure to cut the debt load in 2018 and asked how it planned to reduce it in the future.

That was the first step in a procedure that may eventually lead to a multibillion-euro fine. It also marked yet another chapter in Italy’s long-running budget tussle with Brussels, which already roiled markets at the end of 2018.

The call for an urgent intervention clashes with the view of Italy’s populist government, which favors higher spending and tax cuts to stimulate the economy and rein in debt by boosting revenue.

The Italian “economy’s performance and tax revenue have so far exceeded” the government’s estimates for 2019, Tria said in the reply. “As a consequence, the deficit should be lower” than the Commission’s estimates, he added. The minister also said a budge tightening would be counterproductive for the Italian economy at present.

Debt Ratio

Italy’s debt ratio rose to 132.2% in 2018 and, under the government’s current plan, should equal 132.6% of GDP this year and 131.3% in 2020.

Earlier on Friday, Bank of Italy Governor Ignazio Visco said the debt ratio will probably rise more than the government anticipates as it relies on an ambitious goal of 18 billion euros ($20 billion) from privatizations.

Also on Friday, the treasury said that the content of the letter as earlier reported by some Italian media outlets was inaccurate. Italian bonds had reversed declines and equities trimmed losses after reports that the nation would tell the EU it planned to reduce the cost of key welfare measures.

Deputy Finance Minister Laura Castelli from the anti-establishment Five Star Movement said in a statement that the original draft of Tria’s reply included a reference to a welfare-spending cut.

“I am glad that Prime Minister Giuseppe Conte decided to review parts of the letter that we could not possibly back such as a reduction in the spending for welfare,” Castelli said in a statement released by her office.