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Italy on course to break deficit limit, vows to fix it

Govt's economic blueprint forecasts 3.1% deficit-to-GDP ratio

20 September, 16:22
Italy on course to break deficit limit, vows to fix it (By Paul Virgo) (ANSA) - Rome, September 20 - Premier Enrico Letta admitted recession-hit Italy was on course to cross the deficit limit set by the European Union on Friday, but vowed that his weak left-right government would bring it back on target by the end of the year.

Letta, whose grand-coalition executive is in danger of collapsing in the fallout of the supreme court's decision to uphold a tax-fraud conviction against centre-right leader Silvio Berlusconi, presented an amended version of the government's economic blueprint, the DEF, with revised forecasts.

The new DEF said that Italy's deficit-to-GDP ratio for 2013 was heading for 3.1%, but Letta vowed to bring it back to the EU-mandated target of 3% by the end of the year.

"There is a commitment to maintain the agreements made with European partners and with the European Union," Letta said during a news conference outlining the latest budget measures.

On Thursday European Commission sources warned that Italy will need to take what could be painful corrective budget measures if the DEF forecast a deficit-to-GDP ratio above 3%. But Letta said his government would not need to pass an emergency mini-budget of spending cuts or tax rises to hit the target.

"It will not take particularly significant interventions," Letta said. "The 3% threshold is within reach". Letta blamed the rise in the key ratio to political instability, which has led to a rise in Italy's borrowing costs.

Berlusconi this week backed off from threats to sink the government because of a ban from office after the tax-fraud conviction, but Letta's government is still seen as very fragile.

Earlier this year, the EC closed an excessive-deficit procedure it had opened against Italy in 2009 after the deficit was 3% last year and forecast to be 2.9% for 2013 in the previous version of the DEF.

The Italian government had already revised its deficit forecast up to 3% from 2.9% earlier this month following a decision to roll back the IMU property tax to meet demands from Berlusconi's People of Freedom (PdL) party.

On Tuesday European Monetary and Economic Affairs Commissioner Olli Rehn warned that the Commission would not hesitate to open a new procedure if Italy's deficit went back above 3%.

The price of not meeting the 3% requirement is stiff - states that are under an excessive deficit procedure and have a debt-GDP ratio of over 60% are obliged to divert public money into trying to reduce that ratio. In Italy's case, escaping the procedure has meant about eight billion euros freed up for public spending. Economy Minister Fabrizio Saccomanni stressed Friday that the 3.1% deficit forecast was only a "slight deviation" that will be quickly remedied.

The situation is complex though, as the political turbulence was already set to make negotiations tough for the 2014 budget law. The government is also trying to find the money to avoid a 1% rise in the top band of value added tax scheduled to come into force next month, with Berlusconi's People of Freedom (PdL) saying this issue is another deal-breaker, like IMU was. So the challenge of finding the money to bring the deficit down from the projected 3.1% may be considerable, given how tight the budget is. The weakness of the economy, with Italy struggling to emerge from its longest recession in over two decades, makes matters even more difficult.

According to the DEF, Italy will post negative growth of 1.7 this year, compared to 1.3% in the previous forecast. Saccomanni said he expected Italy's GDP to be flat in the third quarter, after eight consecutive quarters of negative growth, and return to positive growth in the last three months of the year. He said Italy's GDP should grow 1% in 2014 and forecast that the spread between Italy's benchmark 10-year bond and its ultra-safe German counterpart will shrink from around 240 basis points now to 100 thanks to reforms outlined in the DEF.