September 27, 2016 / 4:38 PM / 3 years ago

Italy cuts growth outlook, hikes deficit, reverses debt pledge

ROME (Reuters) - Italy on Tuesday 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.

Italy's Prime Minister Matteo Renzi speaks during a news conference with foreign press in Rome, Italy, February 22, 2016. REUTERS/Alessandro Bianchi/File Photo

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 percent from a 1.2 percent forecast made in April, and lowered next year’s growth to 1.0 percent from 1.4 percent.

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

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 percent.

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

Brussels is particularly concerned about Italy’s public debt, which has risen to more than 132 percent 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 percent against a previous target of 132.4 percent. It stood at 132.3 percent 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.

“OLD AND ABSURD”

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”.

He also told reporters that Europe owed Italy “a huge debt on immigration”, saying the country was spending heavily to accommodate tens of thousands of mainly African refugees who have been arriving on boats from Libya and Egypt.

It remains to be seen whether the Commission will agree with Renzi’s approach, especially as in the case of the schools he is asking for prior agreement to spend more, not for lenience over money spent on an emergency.

The European Commission says Italy was already granted “unprecedented” flexibility, worth about 19 billion euros ($21.37 billion) in its 2016 budget.

The government’s latest growth projections remain more upbeat than those of most independent forecasters.

Last week the Organisation for Economic Cooperation and Development cut Italy’s growth forecasts to 0.8 percent in both 2016 and 2017.

Italian employers confederation Confindustria forecasts growth of just 0.6 percent in 2017, and several large banks have even lower projections, with Barclays Capital forecasting a contraction of 0.1 percent.

($1 = 0.8892 euros)

Editing by Alison Williams and Crispian Balmer

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