This article is more than 1 year old

This article is more than 1 year old

Italy’s populist government will cut its budget deficit targets from 2020, after investors sold off Italian assets and European Union ministers criticised its plans to jack up spending next year.

The ruling coalition last week said it planned to run a deficit of 2.4% of gross domestic product (GDP) next year, tripling the previous government’s target. It also said that the deficit would stay at that level through 2021.

The announcement unnerved markets and prompted criticism from European commission officials but the Five Star Movement leader, Luigi Di Maio, was defiant on Tuesday, pledging not to backtrack “by a millimetre”.

However, government sources told Reuters on Wednesday the aim now was to reduce the deficit and to no higher than 2.2% of GDP in 2020 and 2% in 2021, and possibly lower. Next year’s target remains 2.4% of GDP, they said.

The news sent Italian government bond yields down, and overnight the euro gained against the dollar. Italy’s leading stock exchange, Milan’s FTSE MIB, closed up 0.9% after several days of tumbling share prices.

Speaking at a meeting of Italy’s largest employers’ lobby, the economy minister, Giovanni Tria, confirmed that the fiscal shortfall would be put on a downward path after next year.

“The deficit will increase compared with the previous forecast in 2019, but then there will be a gradual reduction in the following years,” he said, without spelling out what the targets would be.

Earlier, the League leader and deputy prime minister, Matteo Salvini, had indicated the government was changing tack compared with last week’s stance.

“The goal [next year] is to get Italians working again and paying taxes as they work and therefore reduce the deficit and debt in the following years,” Salvini said in a broadcast interview.

The coalition came to power in June promising to slash taxes and boost welfare spending, and says an expansionary budget next year will boost economic growth and thereby curb Italy’s debt – the largest in Europe after Greece at about 131% of GDP.

President Sergio Mattarella hopes there will be as little deficit spending as possible, but is not trying to dictate numbers to the government, a source close to the president said on Wednesday.

Italian media have reported that Mattarella is exerting pressure on the government behind the scenes to keep public finances under control and avoid a head-on collision with the EU.

“The majority of the member states will clearly ask and demand that these [EU budget] rules are observed,” Austrian finance minister Hartwig Löger, whose country holds the rotating EU presidency, said on Tuesday.

Italy had previously pledged to Brussels that next year it would reduce its structural deficit, which is adjusted for the economic cycle and excludes one-off factors.