Italy's Renzi under fire over budget plan as EU prepares verdict

Wed Apr 9, 2014 10:21am EDT

* Critics say Renzi is vague on spending cuts

* Accused of using one-off measures to fund tax cuts

* PM defends budget plan as rigorous, prudent

* Plan hikes debt, structural deficit in 2014

By Gavin Jones

ROME, April 9 (Reuters) - Italian Prime Minister Matteo Renzi defended his fiscal reform plans on Wednesday against critics inside and outside his Democratic Party as the European Commission reminded Italy of its commitment to balance its budget.

Renzi, who outlined his government's Economic and Financial Document (DEF) late on Tuesday, was criticised for failing to provide detail on promised spending cuts and for using one-off revenues to help finance plans for permanent tax cuts.

The DEF, which must be presented to the European Commission, updates the government's economic forecasts and provides the framework for its fiscal plans over coming years .

Stefano Fassina, a PD member and ex-junior economy minister who has often clashed with Renzi, said the DEF marked no shift in economic policy that had failed Italy in recent years and would result in "less growth, fewer jobs and more public debt".

He forecast that before the end of the year the government would be forced to take corrective action to meet its goal for the budget deficit, targeted at 2.6 percent of national output.

Renzi, speaking at a conference in Verona, said he "totally ruled out" the need for a fiscal correction this year and said the government's forecast of 0.8 percent economic growth was "very cautious".

The European Commission and the International Monetary Fund forecast Italian growth of 0.6 percent, but do not take account of 6.7 billion euros of tax cuts for low earners which Renzi has said will take effect in May.

These cuts will translate into an increase of around 80 euros per month in the pay packets of around 10 million Italians and the government's hope is that citizens will spend the money and thus reinvigorate chronically weak domestic demand.

"We have been very cautious and we expect positive surprises in the course of the year, not negative ones," Renzi said.

ONE-OFF REVENUES

The centre-right opposition said Renzi had given no details on where he plans to cut 4.5 billion euros of spending and was relying on unreliable, one-off revenues.

These revenues, amounting to 2.2 billion euros, are due to come largely from an increase in sales tax stemming from a promise by the government to pay back the debt arrears owed by public sector bodies to private suppliers.

Renato Brunetta, lower house leader of Silvio Berlusconi's opposition Forza Italia party, accused Renzi of making empty promises aimed at garnering support ahead of elections for the European parliament next month, rather than helping the economy.

Economist Tito Boeri, of Milan's Bocconi University, said those benefiting from Renzi's promised tax cuts would only spend the money if they were convinced the cuts were properly funded and therefore permanent, and this was still not clear.

And while Renzi characterized his budget plans as rigorous and prudent, a spokesman for the European Commission pointed out that Italy "needs to achieve a balanced budget in structural terms in order to put its public debt ratio on a downward path".

However the DEF raises the government's target for the structural deficit, which strips out the effects of growth fluctuations, to 0.6 percent of GDP from 0.3 percent this year, moving further away from the Commission's recommendation last year for a balanced structural budget in 2014.

The DEF forecasts that Italy's public debt, the second highest in the euro zone after Greece's, will rise to a new record of 134.9 percent of GDP this year, up from a previous forecast of 132.8 percent.

Spokesman Simon O'Connor said the Commission could not assess whether the DEF respected Italy's commitments until it had received the full document. The Commission will issue its country specific recommendations to member states next month, when it also updates its economic forecasts. (Additional reporting by Sara Rossi and Francesco Guarascio, editing by Mark Heinrich)

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