MNI SOURCES: Next Italy Govt To Seek E10-15B Fiscal Leeway

By Silvia Marchetti

     ROME(MNI) - Italy's likely next government will seek additional fiscal

leeway of up to E10-15 billion from the European Union, on the grounds of slower

growth and the cost of both migrant relief operations and infrastructure

investments made this year, sources at the two potential coalition parties told

MNI.

     Officials from the left-leaning Democrat Party and the 5-Stars Movement

said that if they clinch a deal to form a government by Wednesday they were

confident Brussels will be more "open" in granting extra fiscal space, allowing

Italy to avoid an automatic E23 billion increase in value-added tax it has

promised European authorities if it fails to raise revenue from other sources.

The departure of the eurosceptic League party and its combative leader Matteo

Salvini should favour relations, they said.

     "It's pretty obvious that with Salvini out of the way and no more daily

verbal attacks on the European institutions that Brussels will happily grant us

extra fiscal leeway, particularly given that Germany is also facing a technical

recession," said a source with ties to the Democrat party who is familiar with

budget issues. "The new commission seems to be taking a less austere approach",

     A source close to Eurogroup confirmed to MNI that relations between

Brussels and Rome may well improve.

     "While the new government will not fundamentally change anything, the

atmosphere certainly ought to be better and it will certainly be in the interest

of the Eurogroup to help them out," the source said.

     Separately, a European Commission official indicated that a large VAT hike

might have a detrimental effect on the Italian economy given very low growth and

added that that had never been something that the Commission had 'insisted' on.

     Other measures may have to found, the official said, but there would

certainly be flexibility against the backdrop of weaker growth in Italy and

across Europe, given the advent of a more pro-European Italian government.

     If the centre-left and 5 Stars strike a deal there would even be headroom

for tax cuts, though not as large as Salvini's promised E15 billion flat tax,

the Italian party sources said.

     "There would also be additional labour cost cuts and incentives to support

firms and investments", said another Democrat source.

     Budget resources would be primarily raised through a cut in public

expenditures and higher revenues, said a 5 Stars source familiar with the

negotiations.

     Roughly E7 billion are expected to flow into state coffers by the end of

this year thanks to the introduction of electronic invoicing, which has

permitted a crackdown on tax dodgers. An extra E3 billion in savings would come

from lower-than-expected costs from the 5-Stars' "citizens' wage" for the less

well off, which would be incorporated into an expanded version of the so-called

"social inclusion income" to support the jobless introduced by the former

Democrat government two years ago.

     Designated premier Giuseppe Conte is expected to announce between Tuesday

and Wednesday whether the two parties are able to form a government. Sources

close to former Democrat premier Matteo Renzi are confident a deal will be

struck. The 5-Stars founder, comedian Beppe Grillo, has also called for an

alliance.

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

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