People stand in front of a "debt clock" screen displaying Italy's public debt at the Rome's Termini central station in February. Photo: FILIPPO MONTEFORTE / AFP
The ratings agency downgraded the country's debt to Baa3 from Baa2, with a stable outlook, according to a statement.
The decision cited “material weakening in Italy's fiscal strength, with the government targeting higher budget deficits for the coming years,” as well as debt holding near the current 130 percent of GDP “rather than start trending down as previously expected.”
And Moody's said “stalling of plans for structural economic and fiscal reforms” also had negative implications for the country's growth outlook and debt.
Italy's populist government submitted its draft 2019 budget Monday to the European Commission in which it laid out plans to increase spending and end the austerity policies of recent years, despite deficit warnings.
Italy's deficit is now projected at 2.4 percent of GDP, far higher than the 0.8 percent estimate given by the earlier center-right government.
Brussels says Rome needs to cut the deficit in order to begin reducing its massive debt, which exceeds 130 percent of annual economic output — way above the EU's 60 percent ceiling.
The budget drew stinging criticism from the EU's top economic affairs officials, who penned a letter to Rome describing its plans as “unprecedented” and warning that Brussels does not rule out rejecting the entire budget.
Aimed at fulfilling electoral promises, Italy's planned spending boost is what the government calls its “people's budget.”
It includes a series of pension and tax changes that will cost 37 billion euros ($43 billion), of which 22 billion will be paid for by expanding the deficit.
“Following a temporary lift to growth due to the expansionary fiscal policy, the rating agency expects growth to fall back to its trend rate of around one percent,” Moody's said.
“Even in the near term, Moody's believes that the fiscal stimulus will provide a more limited boost to growth than the government assumes.”
The fiscal plan has spooked European financial markets.