September 27, 2016 / 4:30 PM / 3 years ago

Italy set to cut growth forecasts, hike deficit

* New forecasts will form basis for next year’s budget

* PM Renzi says EU fiscal rules “old and absurd”

* Weak domestic demand halted growth in second quarter

By Gavin Jones

ROME, Sept 27 (Reuters) - Italy is poised to cut its economic growth forecasts for this year and next and raise its projections for the budget deficit on Tuesday when the cabinet meets to approve a new forecasting document.

The new forecasts, which will provide the framework for the government’s 2017 budget to be presented next month, will set up a potential tussle with the European Commission, which has urged Italy not to ease up on previously agreed fiscal targets.

However, the euro zone’s third largest economy has misfired this year and posted no growth in the second quarter, upsetting Prime Minister Matteo Renzi’s previous assumptions for public finances.

The Economic and Financial Document (DEF) will cut the 2016 growth outlook to around 0.9 percent from a 1.2 percent forecast made in April, and cut next year’s growth to around 1 percent or 1.1 percent from 1.4 percent, a government source told Reuters.

The goal for the 2016 budget deficit is likely to be raised marginally to 2.4 percent from 2.3 percent and next year’s target is likely to be hiked to around 2.4 percent from 1.8 percent. The cabinet is due to meet at 9 p.m. (1900 GMT).

Brussels is particularly concerned about Italy’s public debt, which has risen to more than 132 percent of gross domestic product, the highest in the euro zone after Greece’s.

Renzi, who has staked his career on a referendum on constitutional reform to be held in December, wants the EU’s fiscal rules to be eased and has attacked other countries for failing to back Italy’s stance.

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 is demanding “flexibility” in EU fiscal rules 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 mountain 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”.

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 are expected to 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)

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