October 28, 2016 / 7:36 AM / 3 years ago

Italy tells Brussels - migrants, quakes, low growth behind budget slip

ROME (Reuters) - Italy has defended its rule-breaking 2017 budget to the European Commission, saying the migrant crisis, post-earthquake reconstruction and lower-than-expected growth are to blame.

A collapsed church is seen after an earthquake in Borgo Sant'Antonio near Visso, central Italy, October 27, 2016. REUTERS/Max Rossi

Instead of cutting its structural deficit, which excludes one-off items and the effects of the business cycle, as euro zone countries are obliged to do, Italy plans to increase it.

Prime Minister Matteo Renzi is keen to avoid belt-tightening ahead of a Dec. 4 referendum on his flagship constitutional reform, which polls currently suggest he is likely to lose.

He has put forward a budget that raises the lowest pensions, reduces sanctions and interest on unpaid fines, and ups investments.

It also sets aside some 6.6 billion euros (6 billion pounds) for emergency spending and reconstruction after a series of earthquakes this year, and for rescuing and sheltering migrants. Some 160,000 migrants have arrived by boat this year, and Italy is housing some 172,000 asylum seekers.

“The number of immigrants and refugees landing on our shores or rescued by our navy and coastguard has soared this year, and there are concrete risks that this trend will persist in 2017,” Economy Minister Pier Carlo Padoan said in a letter to the commission published late on Thursday.

On Tuesday, Renzi said Italy could not handle another year of arrivals like this one, and sharply rebuffed the commission’s criticism of its fiscal targets, saying “instead of opening their mouths, they should open their wallets”.

Brussels asked Italy’s government this week to explain why its latest budget does not reduce the deficit, as the rules require. The commission could ask for budget corrections in feedback due by the end of November.

Short-term emergency costs after major natural disasters may be classified as one-off events and be excluded from the calculation of member state budgets, but “hypothetical” costs may not qualify, a commission spokesperson said on Friday, declining to comment specifically on Italy’s letter.

Among the planned earthquake spending are funds to make 42,000 schools safe if there are major tremors in the future.

In the letter, Padoan does not offer to change the budget, which must be passed by parliament by the end of the year.

Euro zone countries are obliged to cut their structural deficit by at least 0.5 percent of gross domestic product (GDP) per year until it comes into balance or surplus.

But in Rome’s draft plan, the structural deficit rises 0.4 percentage points to 1.6 percent of GDP, rather than falling 0.6 points to 0.6 percent of GDP as requested by EU finance ministers in July.

Though the structural deficit is supposed to adjust for fluctuations in the economic cycle, Italy said another reason it was seeking budget leeway was because of a weaker global economic environment.

“The Italian economy is still experiencing difficult cyclical conditions and thus suggests a more gradual adjustment toward the medium-term objective, which remains a balanced structural budget in 2019,” the letter reads.

($1 = 0.9163 euros)

Additional reporting by Jan Strupczewski in Brussels. Editing by Gavin Jones and Louise Ireland

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