MNI SOURCES: Italy Eyes "Automatic" Budget Cuts

--No Cuts To 2019 Growth Forecasts, Sources Tell MNI

By Silvia Marchetti

     ROME (MNI) - Italy is likely to introduce an "automatic spending cuts

mechanism" if growth falls in a bid to win over the European Commission and

avert an Excessive Deficit Procedure over its budget plans, government sources

told Market News.

     "We will be following up and monitoring the impact on the real economy of

our key measures and reforms through the creation of a specific central

government agency aimed at keeping track of progress and identifying potential

areas for automatic spending cuts if things go south, " said a source with links

to the 5 Star Movement, the major government stakeholder.

     A government source close to the Lega party, the junior coalition partner,

ruled-out that the growth forecast for 2019, set at 1.5%, would be cut: "It is

not our intention to revise such an already approved target. We fully confirm

the entire bulk of the budget law".

     Some reports had indicated that cutting the growth forecast, to make the

budget's assumptions appear more realistic, could be a method of winning over

Brussels.

     --MEASURES COULD BE "RECALIBRATED"

     But, if growth falls over the next three years measures will be

"recalibrated" as appropriate, said the official close to Lega. "First we need

to see what we have implemented, we need some time," the official said.

     Another source with links to 5 Star stressed that were the economic

scenario to change in the following two years growth estimates would be

automatically revised.

     Rome aims to raise some EUR4 billion in the next three years through cuts

to public bodies' expenditures which would be used as a buffer to reduce

potential budget gaps.

     In the explanatory letter Italy is expected to send to Brussels on Tuesday

after the EC rejected its budget in an unprecedented move, Rome could explicitly

state that GDP forecasts would be "flexible" in the long run and subject to

changes.

     --OPEN TO REVISIONS

     "Our reforms are written in stone, but not the macroeconomic scenario,

which can evolve and also depends on other non-domestic factors. For now, the

fact that our economy isn't growing for the first time in a long time, that it's

at a zero level, stands as a further incentive to speed up in the achievement of

our goals", the second source with links to 5 Star said.

     "If things don't go as planned, we are open to revisions and changes, but

if these will be made, it will be along the way, and not as a preventive move

now just to soothe Brussels's fears," argued the official, who confirmed all key

measures present in the budget including a minimum wage for the jobless, a flat

tax and a pension reform.

     Another source close to Lega argued that Italy's deficit in 2019 would

actually be at 2%, rather than the 2.4% maximum, due to extra tax revenues which

have not been so far properly taken into account.

     "This budget law is something totally different from all previous ones, and

thus needs a different approach in measuring its impact, which EC has failed to

do so thus far. The flat tax, the minimum wage and the pension reform that will

allow 400,000 people to retire and turnover in the labour force, will boost

consumption rates and lead to an extra EUR4 billion in tax revenues", said the

Lega official.

     Another government source noted that the vagueness of certain key measures,

heavily criticized by Brussels, was actually "positive: this way, parliament can

do its role in best shaping each single reform according to needs through

specific decrees".

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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