Italy raises 2017 deficit goal, sets up tussle with Brussels

[ROME] Italy on Friday cut its forecasts for economic growth this year and next and raised its goal for the 2017 fiscal deficit, setting up a potential conflict with the European Commission.

The Commission, already unhappy about Italy's reluctance to make decisive cuts to rein in its huge public debt, has not yet signed off on Rome's 2016 budget after warning that it risked breaking European Union fiscal rules.

The Italian economy is expected to grow 1.2 per cent this year and 1.4 per cent in 2017, compared with previous forecasts of 1.6 per cent for both years, according to the Economic and Financial Document (DEF) approved by Prime Minister Matteo Renzi's cabinet.

The DEF, which gives the framework for the 2017 budget to be presented in October, trimmed this year's deficit goal to 2.3 per cent of gross domestic product from 2.4 per cent, but raised next year's to 1.8 per cent of GDP from 1.1 per cent.

The numbers confirmed a draft of the DEF obtained by Reuters earlier on Friday.

The increase in the 2017 deficit will not please the Commission, which Mr Renzi says is too concerned with belt tightening and debt reduction. He insists Italy needs "flexibility" in the EU's fiscal rules to stimulate its chronically sluggish economy.

Italy emerged from a three-year recession at the start of 2015, but the recovery slowed steadily during the year. Its GDP rose just 0.1 per cent in the fourth quarter, giving full-year expansion of 0.8 per cent, half the euro zone average rate.

European Commission Vice President Jyrki Katainen said Italy had already benefitted more than any other country from budget flexibility.

He called on Rome to be "responsible" in view of its debt, which at more than 130 per cent of GDP is the second highest in the euro zone after Greece's.

"Further elements of flexibility are not the answer to today's problems," he told Sky Italia in a television interview.

Economy Minister Pier Carlo Padoan replied that Italy had a right to flexibility because it was reforming its economy, making much-needed public investments.

And, he pointed out, its budget deficit was below the EU's ceiling of 3 per cent of GDP.

"The story that Italy is greedy (for flexibility) is simply wrong," he told reporters after the Cabinet meeting. "It's not that we are greedy, it's that our accounts are in order."

The Commission is due to pass final judgment by the end of May on Rome's 2016 budget and may ask for corrective measures, having criticised Rome for raising this year's deficit goal last autumn.

"There will be no corrective measures," Mr Renzi said bluntly as he illustrated the latest forecasts.

The 41-year-old premier underlined that the debt was expected to edge down this year after eight consecutive annual increases. However, in several of the last eight years the debt had been targeted to come down but failed to do so.

Even the lower growth forecasts are upbeat compared with those of many economists.

The Organisation for Economic Cooperation and Development forecasts Italian growth will not exceed 1 per cent this year.

"The government considers it inopportune and counter-productive to adopt a more restrictive budgetary policy in the light of several factors," the DEF said.

Among these, it cited "the concrete risks of deflation and stagnation due to the international context," and insufficient coordination of euro zone fiscal policy in the face of lack of overall demand in the 19-nation currency bloc.

In this situation, "the perverse effects of excessively restrictive fiscal policy could end up worsening the debt-to-GDP ratio rather than improving it," the document said.

The debt, which reached a record 132.6 per cent of GDP last year, is forecast to be virtually stable this year at 132.4 per cent, revised up from the previous target of 131.4 per cent. It is forecast to fall to 130.9 per cent in 2017.

REUTERS