Italian bond yields will fall as the new government starts to implement its policies to boast the economy with prudent fiscal measures, Economy Minister Giovanni Tria said on Sunday.
Speaking at a business conference on the shores of Lake Como, Tria said some of the coalition's more radical budget plans would only be introduced gradually, reassuring investors that EU fiscal rules would be respected.
"As the government puts words into actions, the (bond yield) spread will return to more normal levels," Tria said.
Investors heavily sold off Italian bonds over the summer, on concerns the governing coalition's fiscal plans would put the country's already huge debt pile under strain.
However, the gap between Italian and German bond yields fell almost 50 basis points at the end of last week after Italy's two deputy prime ministers softened their previous rhetoric and said the coalition would respect EU parameters in next year's budget.
Tria said the government would focus on stimulating the economy with the aim of halving by next year a one-percentage gap that currently exists between Italy and the rest of the eurozone when it came to growth.
Government ministers have pledged to introduce a minimum income for the poor, water down a previous pension reform and reduce taxes in the forthcoming 2019 budget, which must be unveiled by the middle of October.
"We will implement these measures gradually... We are looking into Italy's big state balance sheet to find financial resources to be shifted toward these measures," Tria said.
Underscoring the relatively modest scope of the budget, Massimo Bitonci, an undersecretary at the economy ministry, said that rather than introducing a simple flat tax, as once promised, the government was considering simply cutting the first income tax band to 22 percent from 23 percent.
In an interview with Il Messaggero newspaper, Bitonci said more extensive tax reform would be delayed until 2020 and 2021.
"The point of departure will be to lower the first (tax) band," said Bitonci, a member of the League party, which made the introduction of the flat tax a key part of its election manifesto earlier this year.
Bitonci said the budget would also cut the duty on petrol and offer financial incentives to companies reinvesting profits.
He said the League had some 5 billion euros ($5.8 billion) to play with in the budget, with its coalition partner, the 5-Star Movement, given a similar amount of money.
5-Star is expected to use its share of the budget to introduce a limited version of a so-called "universal wage" for the unemployed -- the cornerstone of its economic program.
Tria said he did not want to lift the budget deficit unnecessarily because this would push Italian debt yields higher on the financial markets and exacerbate state accounts.
"It is useless to find 2 or 3 billion euros more via deficit spending if then we lose 4 billion with an increase in interest rates," he said in Cernobbio.
($1 = 0.8657 euros)