Italian cabinet to approve budget on Tuesday as EU, markets fret

By Gavin Jones

ROME (Reuters) - Italy's cabinet was due to meet later on Monday but the approval of the 2019 budget, which envisages a jump in the deficit that has upset financial markets and drawn criticism from the European Commission, slipped to Tuesday.

The government, backed by the right-wing League and the anti-establishment 5-Star Movement, has already issued the financial framework for the budget, raising the target for next year's deficit to 2.4 percent of gross domestic product.

That is comfortably below the EU's 3 percent ceiling, but up sharply from a targeted 1.8 percent this year, flouting EU rules which call on highly-debt countries like Italy to narrow the deficit steadily towards a balanced budget.

The reaction from Brussels has been fierce, with EU commissioners threatening to reject the package before even formally receiving it, and triggering a war of words with the ruling parties in Rome.

With many aspects of the budget measures still to be defined, key government ministers met ahead of the full cabinet session set for the evening.

But Deputy PM Luigi Di Maio stayed away reflecting what government sources said were tensions between his 5-Star Movement and their ruling allies, the far-right League, over plans for a partial tax amnesty to be included in the fiscal decree, a separate law linked to the budget.

The Commission says the budget will push up Italy's public debt which already amounts to 131 percent of GDP, proportionately the highest in the euro zone after Greece's, rejecting Rome's argument that the expansionary package can lower debt by boosting economic growth.

The budget marks "a change of gear for Italy", Prime Minister Giuseppe Conte said on Sunday, adding that he was confident the EU would soften its stance after the government has had the chance to explain its growth strategy properly.

Italy must send its planned fiscal framework - a separate document from the actual budget law - to Brussels on Monday, and the Commission can reject it and ask for changes, setting off a possible process of negotiations.

Economy Minister Giovanni Tria said last week the deficit would rise by 22 billion euros ($25.5 billion) next year, with 37 billion euros in spending projects and tax cuts partly offset by 15 billion of extra revenues and spending cuts in other areas.

Ministers have said about 10 billion euros will be devoted to 5-Star's flagship policy of a basic income for the poor, while around 8 billion will finance a lowering of the retirement age. Less than a billion will go to fund tax cuts for the self-employed, a project championed in particular by the League.

After the cabinet approves the budget it will pass to parliament, where it must be passed before the end of the year.

Despite international criticism and a sell-off of Italy's government bonds, the budget is popular with Italians. A survey by pollster Demopolis on Friday showed 52 percent backed the plan, compared with 38 percent who gave it the thumbs down.

The spread of Italy's 10-year bond yield over Germany was at around 306 bps, above the 300 basis point threshold the government would likely move to soothe markets.

(Additional reporting by Giulia Segreti; Editing by Richard Balmforth)

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