Italy cuts GDP growth forecasts, hikes deficit and debt

ROME (Reuters) - Italy cut its growth forecasts for this year and next on Tuesday while hiking the budget deficit and public debt, underscoring the economic woes faced by the populist ruling coalition.

Gross domestic product in the euro zone’s third largest economy will increase just 0.2 percent this year, the government said, down from a projection of 1.0 percent it made in December.

The slowdown in growth hurts public finances, and the Treasury raised this year’s budget deficit target to 2.4 percent of GDP from a 2.04 percent goal fixed in December after a drawn-out tussle with the European Commission.

The new deficit target is the same as the one the Commission rejected last autumn as being too high and breaking EU rules.

However, the Treasury said the “structural deficit”, adjusted for GDP growth fluctuations, would be 1.5 percent of GDP this year and in line with commitments made to Brussels.

Italy, whose public debt is proportionally the highest in the euro zone after Greece, is struggling to hold its finances in check while keeping costly promises made by the right-wing League and the anti-establishment 5-Star Movement.

Successive Italian governments have promised and failed to get the debt on a downward path since the 2008 financial crisis, and the latest forecast sees it rising this year to a new post-war high of 132.6 percent of GDP.

Unusually, no news conference was held after the cabinet signed off on the Treasury’s Economic and Financial Document (DEF), which forms an early framework for the 2020 budget.

However, the leaders of both ruling parties issued statements renewing a commitment to cut taxes.

“We will push on, getting the country going again, stimulating growth and helping families that really need it, without trumpeting false promises as has been done in the past,” said 5-Star chief Luigi Di Maio.

RECESSION

The coalition, which came to power last June, is trying to revive an economy that fell into a shallow recession at the end of 2018, leaving a negative carry-over effect on this year.

Italy has been the euro zone’s most sluggish economy since the launch of the euro 20 years ago, and this year it is again seen expanding less than all its peers in the 19-nation bloc.

Growth will be lifted in the second half of the year by a stimulus package that includes tax breaks on investments, lower property taxes on factories and warehouses, and simplified procedures for public tenders, the government said.

Without this “growth decree”, which is still being finalised, GDP would have risen 0.1 percent, it estimated.

The International Monetary Fund on Tuesday forecast Italian 2019 growth of 0.1 percent, the European Commission sees it at 0.2 percent, while the Organisation for Economic Cooperation and Development has projected a 0.2 percent contraction.

The government will update its targets again in September, when it will have to find a way to avoid some 23 billion euros ($25.81 billion) of hikes in sales tax scheduled to take effect in 2020, but which the ruling parties have promised to scrap.

Their task is made even harder by a pledge to also cut income and corporate tax, while reducing the number of tax bands on individuals from five to two.

The new debt-to-GDP target of 132.6 percent is up from a 130.7 percent goal set in December and compares with 132.2 percent registered last year.

For 2020, GDP growth is seen strengthening to 0.8 percent, a downward revision from a 1.1 percent forecast in December. Next year’s deficit target is raised to 2.1 percent from 1.8 percent, and the debt is projected at 131.3 percent.