UPDATE 1-Italy's Renzi says EU deficit rules outdated but will stick to limits

Wed Mar 19, 2014 12:00pm EDT

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By James Mackenzie

ROME, March 19 (Reuters) - The European Union's budget deficit limit is an outdated tool but Italy will respect the commitments it has made despite switching its focus to boosting growth and jobs, Prime Minister Matteo Renzi said on Wednesday.

Speaking in parliament ahead of an EU summit in Brussels on Thursday, Renzi repeated his message that the 28-member bloc had to shed its image as a technocratic promoter of austerity and reconnect with its citizens.

"The 3 percent parameter is, objectively, an anachronistic parameter," he said to applause from deputies, adding however that he would respect Italy's pledges to keep its deficit within 3 percent of gross domestic product.

Renzi was speaking a week after his government announced billions of euros in tax cuts and growth measures which he said would be partly funded by an increase in the budget deficit that could see it widen from the 2.6 percent that Renzi is currently forecasting for this year to just within 3 percent.

"The discussion today isn't about the 3 percent, and I repeat today that there will be no breach on our part," he said.

"The subject today is about using the space that's available, not breaching the limits from Europe."

Italy has promised not only to keep its deficit inside 3 percent this year, but also to keep its structural budget deficit, adjusted for the business cycle, inside 0.5 percent.

The EU Commission had expressed concern that Italy was missing this goal even before Renzi announced last week that he wanted to increase borrowing.

Renzi has promised sweeping economic and constitutional reforms to pull Italy out of its worst slump since World War Two and has met French President Francois Hollande and German Chancellor Angela Merkel in the past week to explain his position.

"If Italy wants to be seen as credible in Europe it has to show it is ready to change itself," he said.

The 39-year-old Renzi has laid out an ambitious timetable promising a new electoral law, 10 billion euros in income tax cuts for low earners, a Jobs Act to try to cut record unemployment and an overhaul of the bloated public administration, all within three months.

He plans billions of euros in spending cuts and a review of public expenditure ordered by the last government has already proposed 34 billion euros of potential savings by 2016.

In the longer term, he wants to create conditions for more stable government by curtailing the role of the Senate, reducing the powerful upper house to an unelected regional chamber with no authority over legislation.

His meeting with Merkel on Monday was widely hailed as a success in Italy but close attention is being paid to whether he can translate his promises into action. (Reporting by James Mackenzie; editing by Andrew Roche)

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