MNI INSIGHT: EU to Avoid Italy Budget Fight Despite Doubts

By David Thomas and Silvia Marchetti

     BRUSSELS/ROME(MNI) - The European Commission and eurozone finance ministers

are likely to prod Italy to come up with more concrete revenue-raising proposals

for its 2020 budget plans, but officials view the country's new government

favourably and a confrontation is unlikely, MNI understands.

     A crackdown on tax avoidance and spending review measures promised by Italy

as it strives to keep its budget deficit to 2.2% of gross domestic product in

2020 are being regarded with scepticism in Brussels, but, beyond a likely

request for requesting additional measures, there is appetite to seek a

pragmatic compromise.

     Italy's deficit plan, which would see next year's shortfall slightly exceed

the 2.1% of GDP pledged to the EU in April when Rome narrowly dodged an

excessive debt procedure, assumes that a E23 billion spike in value-added tax

supposed to activate automatically in the absence of other measures to meet

Europe's fiscal targets will not go ahead.

     Instead, the Italian government's future deficit outlook/scenario based on

unchanged legislation assumes a trend shortfall of 1.4% of GDP, about 0.6% of

GDP higher than Brussels had previously stipulated. The Italians calculate that

Brussels will be willing to allow this difference, equivalent to E14.4 billion,

Italian governing party officials said.

     "There is a wide headroom in EU treaties as to the degree of flexibility a

member state can be granted to support the economy in consideration of several

key factors, mainly flexibility for investments and reforms, for which we will

define detailed plans soon," said an official from the Democratic Party, which

shares a coalition with the 5-Stars Movement. The official expressed confidence

that the European Commission would "fully grant Rome the greatest possible

margin of flexibility as envisaged in all EU treaties."

     --DRAFT BUDGET

     Such forbearance would mean that Italy would only have to find roughly an

additional E15 billion in fresh revenues and savings in its draft budget, set to

be approved by Oct. 15. These it hopes will come from the crackdown in tax

avoidance, spending cuts and a thorough tax expenditure review.

     "We aim to secure leeway on the deficit of +0.8% of GDP, amounting to

E14.4, which will help us avoid next year's VAT spike worth E23 billion and fund

other important measures such as labour cost cuts," said another Democratic

source, adding that the credibility of new Finance Minister Roberto Gualtieri, a

former chair of the European Parliament's economic and monetary affairs

committee, would work in Italy's favour.

     But a source with ties to the 5-Stars Movement was less optimistic, noting

that hopes of raising some E7 billion from cracking down on tax avoidance as

well as additional resources worth 0.2% of GDP from privatisation when the state

has not disposed of any significant assets in the past three years might strain

credibility.

     Italian sources added that more revenues would come from electronic

invoicing launched this year and from a fall in debt servicing costs since the

exit of the eurosceptic League from the government in early September. A

revision of tax deductions, credits and bonuses will also be crucial, said one

source, calling the current system "a jungle".

     Italy is also pleased by the appointment of former prime minister Paolo

Gentiloni as the EU's new commissioner for economic and financial affairs. But

he is not expected to take a relaxed attitude towards his own country's budget

transgressions as he seeks to establish his credibility as the EU's fiscal

watchdog.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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