Italy lifts deficit goals, seeks to avoid EU fight

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    ROME- The Italian government slightly raised the country’s budget deficit target for 2020 on Monday, looking to head off a programmed hike in value-added taxes while avoiding renewed tensions with the European Union.

    The new coalition, which includes the anti-establishment 5-Star Movement and pro-European Democratic Party (PD), is set to unveil its first budget next month which will be based on an array of new forecasts agreed by the cabinet.

    The latest figures point to growth of 0.1 percent this year, down from a previous goal of 0.2 percent, with output seen at a meagre 0.6 percent in 2020 compared to a previously forecast 0.8 percent, the Treasury’s Economic and Financial Document said.

    The cabinet said the budget deficit would come in at 2.2 percent of gross domestic product (GDP) next year compared with 2.1 percent in the last such document released in April.

    The structural deficit, which is stripped of growth fluctuations and is closely watched by Brussels, is forecast to rise to 1.4 percent of GDP in 2020 from 1.2 percent this year — in defiance of EU rules which call for the number to decline progressively towards zero.

    In July, the European Commission urged Italy to reduce the structural deficit by 0.6 points next year.

    The previous Italian government, which included the eurosceptic League party, clashed ferociously with Brussels last year when it pledged to hike the 2019 deficit to 2.4 percent of GDP as it sought to boost welfare spending.

    However, the League is not in the new coalition and Economy Minister Roberto Gualtieri said on Monday he hoped to have a “constructive dialogue” with Europe over the budget, avoiding the sort of inflammatory language that so riled EU officials in the past.

    Much of the deficit in the forthcoming budget will be used to head off an automatic increase in value-added sales taxes (VAT), that had been due to come into force in January and was meant to raise some 23 billion euros ($25.2 billion) to ensure Italy complied with EU fiscal rules.

    Economists warned such a hike could have snuffed out Italy’s timid growth and the new government, which took office last month, said avoiding the VAT rise was a priority.

    Italy’s debt, proportionally the second highest in the euro zone after Greece’s, is forecast to rise to a new peak of 135.7 percent this year, before declining to 135.2 percent in 2020.
    Last year’s ratio came in at 134.8 percent.

    Heavily indebted Italy has consistently underperformed its European partners over the past two decades and successive governments have promised to reverse the trend through multiple reform programs. These have mostly failed.

    The latest administration has said it will focus on battling tax evasion and look to raise a hefty 7 billion euros from a new crackdown next year. As part of this plan, it aims to introduce measures to encourage people to use easily traced credit cards rather than resort to opaque cash transactions. – Reuters