Italy on Friday hiked its forecasts for economic growth this year and next and opened a potential conflict with the European Commission by also raising its targets for the budget deficit and the public debt. The government of Prime Minister Matteo Renzi raised this year's growth forecast to 0.9 percent from 0.7 percent seen in April, and nudged up the 2016 outlook to 1.6 percent from 1.4 percent.
However, rather than using higher tax revenues as the economy grows to accelerate deficit and debt reduction, Renzi has promised to slash taxes by 35 billion euros ($39.69 billion) by 2018. The forecasts, which will be the basis of the 2016 budget to be presented in mid-October, left this year's deficit target unchanged at 2.6 percent of gross domestic product but raised next year's goal to 2.2 percent from 1.8 percent.
"Italy is on the move again," Renzi told reporters after his Cabinet signed off on the new targets. The government will ask to hike the deficit goal further to 2.4 percent next year in light of the cost incurred to Italy by the EU's ongoing migrant crisis, he said. The 2017 deficit is also revised up.
The debt-to-GDP ratio, the highest in the euro zone after Greece's, is also forecast to decline slightly more slowly than previously planned from a peak of 132.8 percent this year, revised up from 132.5 percent. The debt forecasts do not appear to respect the pace of reduction set out in the EU's so-called Fiscal Compact and the government faces a tough task over coming weeks to convince the European Commission to sign off on them before the budget.
Moreover, the so-called "structural" budget deficit, which is adjusted for the business cycle and is closely watched by the Commission, was hiked sharply to 0.7 percent of GDP next year from 0.4 percent, rising from a projected 0.3 percent in 2015. Renzi said Italy would be allowed an "expansionary" 2016 thanks to its negotiating efforts during its 6-month presidency of the EU last year. The 40-year-old premier, who has long urged the EU to focus on growth rather than austerity, says he deserves a "flexible" interpretation of the rules to reward Italy for his reforms in areas such as the labour market and the banking system.
He may not get all the leeway he wants, but with the euro zone debt crisis defused by the expansionary policies of the European Central Bank, the Commission is likely to cut him more slack than previous Italian governments obtained. Renzi, whose approval ratings have fallen sharply in the last year, plans tax cuts of more than 5 billion euros next year, mainly by abolishing taxation on primary residences, municipal services, agricultural buildings and industrial equipment. He wants to proceed with deeper cuts to corporate tax and income tax in 2017.
He points out that even with his expansionary plans, the budget deficit remains clearly below the EU's 3 percent-of-GDP limit and on a downward trajectory, while debt is targeted to fall next year for the first time since 2007. The government's higher GDP forecasts reflect better-than-expected data up to June and contrast with warnings this month by the European Central Bank that growth in the broader euro zone may be weaker than previously expected this year and next. The euro zone's third largest economy emerged from a three-year recession with growth of 0.4 percent in the first quarter and 0.3 percent between April and June. Retail body Confcommercio forecast this month that GDP would accelerate to 0.7 percent in the third quarter on the back of strong consumer spending in July, but national statistics bureau ISTAT has a more modest forecast of 0.3 percent.
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