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Italian populists will disappoint voters with upcoming budget, former prime minister warns

Key Points
  • The populist government has promised to increase public spending despite a very high level of debt.
  • But according to the previous Italian Prime Minister, the government "will try a form of compromise between their promises and what they will deliver."
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The populist coalition government in Italy will disappoint their voters over spending plans for 2019, the previous Italian Prime Minister Paolo Gentiloni told CNBC Friday.

The leftist Five Star Movement and the right-wing Lega are currently working on the 2019 budget. This document has drawn a lot of attention following promises from both parties to increase public spending next year — an idea that questions the stability of the Italian economy, given its 2.3 trillion euros debt pile.

"I think that they raised, frankly, too many expectations on the people. So people that voted for the Five Star Movement and for the Lega are expecting some of the fantastic promises they received in the electoral campaign, they will not have it. They will not have it, because if they will have it, Italy will be in a very dangerous position," Gentiloni told CNBC's Steve Sedgwick on the sidelines of the Ambrosetti Forum in Italy.

The populist government has promised to reduce taxes, give a citizens' income, change previous reforms to the pension system and to stop a VAT increase that was scheduled for next year. UBS analysts said these measures could up between 4.5 and 7 percent of gross domestic product (GDP).

But according to the former Italian Prime Minister, the government "will try a form of compromise between their promises and what they will deliver."

"The risk is that we have an enormous difference between what was promised in the electoral campaign, from the two populist parties that are now governing Italy, and what they are able to deliver with a budget law maintaining a balance in the European framework," Gentiloni, who governed Italy from December 2016 until last June, told CNBC.

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European fiscal rules dictate that countries do not present an annual budget deficit higher than 3 percent. However, some members in the new Italian government have said that they will go over the European threshold if they believe that's what it takes to revamp the Italian economy.

"I frankly do hope that also the business community, the trade unions, all the social world in Italy is pushing against a crazy budget law," Gentiloni told CNBC.

"The problem is not the rules of Brussels, it is how neglecting the rules of Brussels have an impact in your reputation in the international markets," he said.

Several analysts have told CNBC that if the government challenges the European deficit rules, it is likely that the borrowing costs for Italy will go up.