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Italy's coalition government looks like it will be sticking to European fiscal rules when it comes to presenting its 2019 budget and spending plans in the coming weeks, but tense relations and rivalries within the cabinet are fast developing and pose a risk of fresh political crises.
The dynamics between the two ruling parties — the right-wing, anti-immigration Lega and anti-establishment 5 Star Movement (M5S) — are shifting and a "power struggle" is emerging, according to Hetal Mehta, European economist at Legal and General Investment Management.
"At the time of the last election (in March), the 5 Star Movement had the bigger vote share, but they are now consistently polling below the League (Lega) and that is clearly making them nervous. They feel that they need to grasp the nettle and actually get some of their policies pushed forward," Mehta told CNBC on Wednesday.
Matteo Salvini and Luigi Di Maio, the leaders of Lega and M5S respectively and joint deputy prime ministers, had promised voters that they would increase welfare spending, cut taxes and rollback unpopular pension reforms when they formed an unlikely alliance in May after March's inconclusive election.
Since then, Salvini, who is also interior minister, has become the more prominent of the two men, taking a hard stance on immigration, a political hot potato in Italy as the country that has seen a large influx of migrants from mainly Africa, and his party has risen in opinion polls.
The latest survey of 1,500 Italian adults by news program TG La7 on September 17, showed Lega at the top of voter polls, with 31.6 percent of the vote, above M5S' 28.7 percent.
In some ways, Lega has had the easier task of gaining voter popularity, Mehta said.
"You can talk about low-hanging fruit here, you can talk tough about immigration (as Lega do). Whereas for Di Maio, who's in charge of the labor ministry, getting any results there is going to be a much more long-term gain and it's going to be harder for him to politically capitalize on that in the short-term so that power struggle is there. "
Aside from party rivalries and the potential for a power struggle between the deputy prime ministers, divisions are emerging in policy too.
Lega wants to implement a tax amnesty that it says could partly fund its pledge to rollback pension reforms that increased the retirement age. On Sunday, it was reported that only taxpayers who owe up to 1 million euros ($1.17 million) to Italy's tax agency will be eligible for the amnesty, however. Mehta said this could be a source of disagreement between the ruling parties.
"The League and their tax amnesty would definitely be benefiting higher-income taxpayers rather than the lower-income taxpayers. Given the 5-Star's focus on helping those on lower incomes, this is going to be a tension and it's not likely to be resolved until next year or even further out when various parts of the budget are fulfilled or not," she said.
Other spending plans promised by the parties are being postponed or look uncertain. Lega's policy of a "flat tax" rate on personal income has been pushed back to 2020, Italian media reports suggest, while M5S' flagship policy of a basic universal income (of around 780 euros, or $911, a month) is looking uncertain as ministers draw up Italy's spending plans for 2019.
Salvini and Di Maio's policies are costly but Economy Minister Giovanni Tria has sought to reassure investors and the European Commission, which has to approve Italy's budget, that Rome will stick to fiscal rules requiring the budget deficit to be no more than 3 percent of gross domestic product (GDP). There has been pushback from Salvini and Di Maio, however.
On Tuesday, Di Maio denied a report that he called for the resignation of Tria amid differences of opinion over the budget. According to La Stampa newspaper, Di Maio said Tria could lose his job if he refuses to introduce a universal income for the poor. The measure was a flagship campaign pledge of the M5S.
Mehta said there would be a "negative reaction" from markets if Tria, seen as a moderating influence on the somewhat maverick coalition government, was fired.
"The concern would be that we'd end up with someone who was going to blow those fiscal rules out of the water and maybe they'd try to put someone more skeptical in there."