MNI SOURCES: Italy To "Stretch" But Not Break 3% Deficit Rule

--Rome To Push Ahead With Citizens' Income, Flat Tax

By Silvia Marchetti

     LONDON (MNI) - ROME (MNI) - Italy's coalition government is ready to fully

"stretch" the EU's 3% deficit-to-GDP rule but without breaching it and will not

ask the European Commission for any extra fiscal leeway, a government source

with links to the Lega party told Market News.

     "While we intend to respect fiscal targets and commitments to curb public

debt, we will come close to the 3% deficit threshold without overstepping it. We

are in a very delicate position: we still have not had the opportunity to

clearly outline to Brussels what our key measures and true objectives are, and

how these can support the economy and consumption rates. Once our agenda is in

front of the European Commission, we are confident it will understand," said the

economic official.

     Rome isn't going to break the EU's rules in its forthcoming budget, but

neither will it drop expensive plans, including both a dual-rate "flat tax" --

set at 15% and 20% and promoted by the right-wing Lega --, and a so-called

citizens' income aimed at helping the poor, which has been promised by the

populist 5-Stars Movement, the other partners in the coalition.

     The source's comments compared to reports by Italian newspapers that the

Lega was pushing for a deficit of just above 2%, while Finance Minister Giovanni

Tria wants to limit it to as little as 1.5%.

     Other Lega top officials, close to the budget talks, have told MNI that

they support the option of fully exploiting the deficit threshold if needed. One

source noted how "even virtuous France" had failed to keep within the 3% deficit

rule in past years, with no severe consequences. Deputy Prime Minister Luigi Di

Maio, leader of 5-Stars, told newspaper Il Fatto Quotidiano Aug. 28 that the

deficit limit might be breached if necessary to increase investment spending.

     "We are still defining these measures, their extent and how they will be

funded, but the resources needed are all there, we just need to figure out how

to earmark them. No need to ask at this stage for any fiscal leeway or help from

Brussels", added the source, stressing that the government would never go "cap

in hand" to the commission.

     The coalition is expected to revise fiscal targets set out by the previous

centre-left government, which had forecast a deficit of 0.8% of GDP for next

year, by the end of September. Once these targets are approved, the government

will prepare the detailed 2019 budget, which needs to be forwarded to Brussels

by mid-October for an initial green light.

     According to a Bank of Italy source, the ruling coalition will end up

sticking to its commitments and eventually succeed in reassuring markets that it

remains on a sustainable fiscal path, despite mixed messages on EU budget rules

from various ministers over the past few months.

     "The debate over which measures to adopt is purely political, what matters

is that the overall impact on public finances will be sustainable. The

government is aware that it cannot and must not go off-piste in curbing public

debt, which remains key to strengthen investors' confidence", said the central

bank source.

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