July 12, 2017 / 7:31 PM / in 10 days

Brussels opens door to more budget flexibility for Italy

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FILE PHOTO: European Commission Vice-President Valdis Dombrovskis addresses a news conference at the EU Commission headquarters in Brussels, Belgium May 22, 2017.Francois Lenoir

ROME (Reuters) - The European Commission signalled on Wednesday it may again grant Italy some flexibility around its deficit-cutting commitments for next year but warned that the national debt must fall, an official letter showed.

Stubbornly slow-growing Italy proposed in June to cut its structural budget deficit by 0.3 percent of gross domestic product next year, sharply reducing a previous pledge and potentially dodging an unpopular sales tax hike.

In a letter addressed to Economy Minister Pier Carlo Padoan on Wednesday, European Commission Vice President Valdis Dombrovskis and Economics Commissioner Pierre Moscovici suggested the rules could be bent in some circumstances.

"The Commission may in some cases consider as adequate a fiscal adjustment somewhat below the requirement prescribed by the matrix," the letter posted on the Italian Treasury's website said.

The EU's executive will also take into account the need to support Italy's economic recovery, it said, while adding that the government must still deliver "a significant fiscal adjustment," and ensure a fall in the public debt.

The assessment of Italy's 2018 budget, to be presented by mid-October, would "primarily" take into account whether it cuts public spending net of debt servicing costs, the letter said.

Italy, whose debt of around 133 percent of GDP is the highest in the euro zone after Greece's, has repeatedly tussled with the Commission over its budget goals.

Last month the government of Prime Minister Paolo Gentiloni passed a mini-budget demanded by Brussels to rein in the 2017 deficit, which is now targeted at 2.1 percent of GDP.

The Commission's letter was "good news", Gentiloni told reporters at a news conference in the northern city of Trieste.

Italy's June proposal backtracked on a previous plan to cut the structural deficit, which excludes one-off items and the effects of the business cycle, by 0.8 percent of output in 2018.

The ruling Democratic Party (PD) is anxious to avoid severe belt-tightening measures ahead of a national election next Spring.

PD leader Matteo Renzi ruffled feathers in Brussels this week by proposing that Italy should actually raise its deficit to 2.9 percent of GDP and hold it at that level for five years, to allow for tax cuts to try to boost growth.

Reporting by Isla Binnie and Gavin Jones; Editing by Crispian Balmer and Robin Pomeroy

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