Italy cuts growth outlook, hikes deficit, reverses debt pledge

ROME: Italy cut its economic growth forecasts and sharply hiked its target for the 2017 budget deficit for the second time in five months, setting up a potential clash with Brussels.

The forecasts will set the framework for the 2017 budget and Prime Minister Matteo Renzi is anxious to avoid unpopular belt tightening measures ahead of a December referendum on constitutional reform that could decide his political future.

The European Commission has urged Rome not to ease up on previously agreed fiscal targets, but the euro zone’s third largest economy has slowed and posted no growth in the second quarter, upsetting previous public finance assumptions.

The Treasury’s Economic and Financial Document (DEF) cut the 2016 growth outlook to 0.8 per cent from a 1.2 per cent forecast made in April, and lowered next year’s growth to 1.0 per cent from 1.4 per cent.

The goal for the 2016 budget deficit was nudged up to 2.4 per cent of gross domestic product (GDP) from 2.3 per cent and next year’s deficit was hiked to 2.0 per cent from 1.8 per cent.

However, taking into account extra spending on immigration and earthquake reconstruction that the government expects to exclude from EU calculations, Renzi said the real deficit next year could hit 2.4 per cent.

Italy has repeatedly raised its deficit targets in recent years. The 2017 goal had stood at 1.1 per cent until April, when Renzi lifted it to 1.8 per cent.

Brussels is particularly concerned about Italy’s public debt, which has risen to more than 132 per cent of GDP, the highest in the euro zone after Greece’s.

The government acknowledged on Tuesday that despite repeated assurances, it would not lower the debt-to-GDP ratio this year, saying it would come in at 132.8 per cent against a previous target of 132.4 per cent . It stood at 132.3 per cent in 2015.

The 41- year- old Renzi took office in February 2014 promising to revive a chronically weak economy, but growth has continued to underperform Italy’s partners and ground to a halt in the second quarter, held back by weak domestic demand.

Renzi wants greater flexibility in the EU’s Stability Pact and says any money he spends on tackling the influx of migrants from north Africa and making Italy’s schools earthquake proof will not be included in overall deficit limits.

“What is spent on immigration and the earthquake will not be counted in the Stability Pact,” he said on Tuesday.

He added that he was not only referring to the costs of rebuilding the hill towns destroyed by a quake in central Italy on Aug 24, but also the cost of making Italy’s schools safe throughout the country.

“The stability of our children is more important than the stability of European bureaucracy,” he said, blasting the EU’s fiscal rules as “old and absurd”. — Reuters