Rome digs in over budget plan as pressure rises

By Giuseppe Fonte and Steve Scherer

ROME (Reuters) - Italy's ruling coalition said on Wednesday it would not "backtrack" on plans to increase deficit spending, digging in against financial market and EU pressure and brushing off criticism from parliament's budgetary office.

The budgetary office, a non-partisan body tasked with verifying budget sums, refused on Tuesday to validate the government's multi-year plan, saying it used forecasts for economic growth that were too optimistic.

The parliamentary budget office opinion is not binding, but its rejection of the growth forecasts forced Economy Minister Giovanni Tria to return to parliament for a second straight day to explain.

Tria, struggling to impose his views as a moderating influence on fiscal matters within the cabinet, told parliament the government stood by its forecasts.

Investors have responded to the budget plan by selling Italian debt, raising the cost of borrowing and hurting banks that have large holdings of government bonds.

"The rise of yields on state bonds recorded in the past few days is certainly worrying, but I want to repeat that it's an excessive reaction that isn't justified by Italy's economic fundamentals," said Tria.

"This budget doesn't put into discussion the sustainability of the debt. It's clear that a government must try to recover confidence and it will do all it can to recover confidence," Tria added. Bond yields declined slightly on Wednesday after his remarks.

The leaders of both coalition parties repeated that they would not give in to pressure. On RAI state radio, anti-establishment 5-Star Movement leader Luigi Di Maio said he would not "betray" Italians by changing the budget plan.

Far-right League leader Matteo Salvini, speaking on RAI state TV, warned "speculators" against betting that the government would climb down.

Salvini said "a few big financial institutions" are "betting that Italy will backtrack (on the budget). They're wrong."

Tria said deficit spending would be worth 22 billion euros next year with the budget including 15 billion euros ($17.2 billion) in cuts and extra revenue to cover 37 billion in total additional spending.

The government, which took office in June, has fixed next year's deficit at 2.4 percent of gross domestic product (GDP), three times the forecast of the previous centre-left administration. Economic growth is seen at 1.5 percent next year, 1.6 percent in 2020, and 1.4 percent in 2021.

($1 = 0.8704 euros)

(Additional reporting by Giselda Vagnoni, Giulia Segreti, Angelo Amante, and Stefano Bernabei, editing by John Stonestreet)