July 6, 2018 / 2:40 PM / in 8 months

Exclusive: Italy aims to lift 2019 deficit/GDP target to around 1.4 percent: sources

ROME (Reuters) - Italy’s new government plans to raise its deficit target for 2019 to around 1.4 percent of economic output against a goal of 0.8 percent drawn up by the previous administration, two sources said on Friday.

The coalition, made up of the anti-establishment 5-Star Movement and far-right League, took office last month amid investor concerns they would smash European Union budget restraints and begin a spending spree.

Economy Minister Giovanni Tria has sought to reassure financial markets and has said the government is determined to reduce its debt mountain and boost sluggish growth through investment and structural reforms.

Speaking to parliament on Tuesday, Tria said the 2019 deficit target was “too drastic”, although he gave no indication of where he thought it should go.

One of the sources with knowledge of the matter said: “The Treasury aims to raise the 2019 deficit to 1.3 or 1.4 percent of GDP. This translates into a margin of around 0.6 percentage points of GDP.”

Hours later, another Treasury source said it was “far too soon” to talk about what any new target might be.

The source said Rome had started “positive” discussions with the European Commission to see what space there might be for eventual revisions to Italy’s 2019 budget goals, adding that the new forecasts would be published in September.

Increasing the deficit by around 0.6 percentage points would provide some 11 billion euros ($13 billion) of additional spending capacity. That would be used to help stave off the threat of an automatic increase in sales taxes because of previously missed deficit targets.

The previous centre-left administration promised Brussels that Italy’s fiscal deficit would fall this year to 1.6 percent of GDP from 2.4 percent in 2017.

The European Commission has asked Italy to lower the deficit by more, but Tria said on Tuesday that with the economy slowing there would be no additional belt-tightening for 2018.

A source said the planned rise in the 2019 target would be presented to the EU Commission “as a one-off increase that does not impact the structural deficit”.

It remains to be seen how Brussels will react. Italy has repeatedly increased its deficit targets in recent years, while maintaining a downward trend and keeping the fiscal gap inside the EU’s 3 percent limit.

The approach has normally been treated indulgently, with the Commission granting Rome so-called “flexibility” in interpreting its fiscal rules.

Think-tanks are scaling back their forecasts for growth next year, which will complicate the Treasury’s task in meeting its budget goals. Credit rating agency Standard & Poor’s on Friday forecast Italian 2019 growth of 1.2 percent, compared with the official goal of 1.4 percent.

Reporting by Luca Trogni and Giuseppe Fonte; Writing by Crispian Balmer and Gavin Jones; Editing by Catherine Evans

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