Reality will tame the Italian Prime Minister’s next spending plans

Far-right Brothers of Italy party leader Giorgia Meloni speaks during a demonstration by center-right opposition parties in Rome, Italy, July 4, 2020. REUTERS/Remo Casilli

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MILAN, Aug 11 (Reuters Breakingviews) – Italy’s next government is likely to have big spending plans. A coalition of right-wing parties appears poised to win the September general election, making Georgia Meloni of the nationalist Brothers of Italy party prime minister. The high public debt and the vigilance of the European Union will burst the craziest trial balloons of the group.

The brutal fall of Mario Draghi’s executive last month paves the way for a new Italian government. An alliance comprising the Brothers of Italy, the Anti-Immigration League and former Prime Minister Silvio Berlusconi’s Forza Italia would win 49% of the vote, according to opinion polls, well ahead of its divided political rivals. Meloni’s party, which has its roots in post-war neo-fascism, opposed Draghi’s agenda and has a Eurosceptic past, could capture 24% of votes.

One of the alliance’s priorities is to cut taxes to stimulate consumer demand. While the group has yet to release an official manifesto, its plans include extending a flat tax rate of 15% to self-employed workers earning up to €100,000 a year from the current €65,000. It’s manageable. A bolder plan to extend the treatment to all workers and pensioners, however, could cut government tax revenue by around 40 billion euros a year, according to economics professor Massimo Baldini, or more than 2% of Italy’s annual production. This would make it more difficult to reduce public debt, estimated at 147% of GDP this year.

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Meloni’s coalition also wants to revamp a €200 billion post-pandemic investment plan agreed with the European Commission. Certainly, the war in Ukraine suggests that more funds could be spent on energy infrastructure. Yet any change will require support from Brussels, jeopardizing the disbursement of crucial cash to kick-start Italy’s growth.

Finally, Meloni also favors a greater state presence in Italy Inc. This could jeopardize agreed privatizations such as that of Alitalia’s successor ITA and lender Monte dei Paschi di Siena (BMPS.MI). ).

However, Italy needs the support of investors to refinance its debt. Market jitters forced a former anti-establishment leader to rein in costly fiscal plans in 2018 and 2019. Additionally, the European Central Bank signaled in July that it would only step in to support countries facing speculative attacks. if they respect the European budgetary rules and do not breathe. consolidate their public finances. And rising government bond yields, with the spread over German 10-year Bunds doubling to 200 basis points in a year, suggests Italy cannot take bond markets for granted. These external constraints will temper any radical fiscal action.

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BACKGROUND NEWS

Italy will hold general elections on September 25.

A right-wing government coalition that includes the nationalist Brothers of Italy party, the Anti-Immigration League and Silvio Berlusconi’s Forza Italia would win 49% of the vote, according to an opinion poll carried out on August 9 by pollsters Quorum and YouGov.

The Brothers of Italy party, which has its roots in post-war neo-fascism and is led by Giorgia Meloni, is Italy’s most popular party with 24% support. The party was in opposition while outgoing Prime Minister Mario Draghi led the Italian government.

Meloni, who in the past supported Italy to leave the euro, recorded a video message in three languages ​​on August 10 saying that a future government led by her would not threaten the country’s financial stability and would stick to Rome’s traditional alliances such as the European Union. and NATO.

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Editing by Neil Unmack and Streisand Neto

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