* Official says Italy should breach 2 pct/GDP deficit in 2019
* Economy minister ready to allow 1.8 pct/GDP - report
* Deputy PM says economic growth more important than markets
By Giselda Vagnoni
ROME, Sept 20 (Reuters) - Italy’s ruling parties want to spur economic growth by setting next year’s budget deficit target at more than 2 percent of annual output, a level that clashes with European Union commitments and may boost the country’s mammoth debt.
Earlier this month, Economy Minister Giovanni Tria reassured the European Commission that he would stick to goals that would improve the public finances, including cutting Italy’s structural deficit, which is adjusted for economic cycles and one-off spending or income, and lowering debt.
But Tria, an academic and member of neither ruling party, is locked in a tug-of-war with the anti-establishment 5-Star Movement and the right-wing League, who want major spending on their flagship campaign promises amid flagging growth.
“I think we can even breach the 2 percent level on condition we do it not to fund demagogic measures but to put the country on a growth path,” Cabinet Undersecretary Giancarlo Giorgetti, a prominent member of the League, said in a television interview on Wednesday night.
To improve the structural deficit even slightly, Italy’s headline deficit needs to stay between 1.5 and 1.7 percent of gross domestic product (GDP), EU officials and economists have estimated.
In August, Deutsche Bank said Italy could allow its deficit to rise as high as 2.3 percent of GDP without harming plans to lower the public debt, which at about 132 percent of GDP is the highest in the EU after Greece.
Tria wants to keep the 2019 budget deficit at 1.6 percent of GDP, according to a government source, while sources from the 5-Star and League have told Reuters they want it as high as 2.5 percent and not below 2 percent.
Italian daily Il Messaggero reported on Thursday Tria was prepared to allow the 2019 budget deficit to inch as high as 1.8 percent of GDP. A ministry spokeswoman did not confirm this.
Tria has to set growth, deficit and debt targets for next year’s budget by Sept. 27. The prospects of slower-than-expected growth will also give Italy less room to manoeuvre next year.
The economy ministry sees growth at 1.2 percent this year, compared to an April forecast of 1.5 percent, and at 0.9 percent next year, calculated on the basis of current legislation, compared with 1.4 percent previously, sources close to the matter told Reuters on Thursday.
Italy, like all other euro zone countries, will have to submit its draft budget for next year by mid-October. The Commission could reject it if it decides it is out of line with rules, a power the EU executive has so far never used.
But markets have been unnerved by the debate, with yields widening and falling according to the tone of daily comments coming from the ruling parties, which took power in June. Financial markets sold off Italian bonds heavily over the summer on fears of a big jump in spending.
Italian government bond yields dipped on Thursday as improved risk sentiment in global markets allowed the market to recover some ground from the previous day’s sharp sell-off.
Deputy Prime Minister Luigi Di Maio of the Five-Star Movement said on Thursday the priority of the government “is to make life better for Italians, not to reassure markets”.
“I’m fully aware what it means to increase the deficit and what can happen in the markets, and that’s why we won’t hike the deficit to give bonuses but to fund a credible plan for the growth of the country,” Di Maio said in a radio interview. (Reporting by Giselda Vagnoni Additional reporting by Luca Trogni in Milan and Giuseppe Fonte in Rome Editing by Steve Scherer and Gareth Jones)