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UPDATE 2-Italy asks EU for more budget leeway as election edges closer
June 1, 2017 / 11:55 AM / 2 months ago

UPDATE 2-Italy asks EU for more budget leeway as election edges closer

4 Min Read

* Rome seeks to avoid tough deficit cuts before election

* Asks to row back on budget pledge to Brussels

* EU has repeatedly bent rules for Italy

* Chances rising of early vote in the autumn (Writes through with detail, economist quote)

By Giuseppe Fonte and Isla Binnie

ROME, June 1 (Reuters) - Italy is asking EU authorities for a deep discount on its 2018 deficit-cutting commitments, an official letter showed on Thursday, as the chances of an early election rise.

Economy Minister Pier Carlo Padoan wrote to European Union officials with a proposal to reduce the structural budget deficit by just 0.3 percent of gross domestic product next year, a significant cut from a previous pledge.

"A tighter fiscal consolidation would jeopardise the recovery and put at risk social cohesion," Padoan said in the letter dated May 30, the same day Italy's main parties agreed on a new voting system which could lead to an election this autumn.

If the European Commission accepts the new target, the government would have more leeway to include vote-winning spending measures in next year's budget, which must be presented by mid-October and passed by the end of 2017.

It could dodge a 20 billion euro ($22.44 billion) sales tax hike due on Jan. 1, which was put in place to help meet the previous deficit goals but would be unpopular with voters.

Padoan's letter, addressed to European Commission Vice President Valdis Dombrovskis and Economics Commissioner Pierre Moscovici, was posted on the Treasury's website.

It backtracks on a plan presented in April to cut the structural deficit, which excludes one-off items and the effects of the business cycle, by 0.8 percent of output in 2018.

In a context of stubbornly low growth and high unemployment, Padoan said the lower target would still reduce Italy's public debt, which at around 132 percent of gross domestic product is the highest in the euro zone after Greece's.

Under EU law, each member state should reduce its structural deficit by 0.5 percent of output each year until it reaches balance or surplus, but Brussels has repeatedly agreed to bend the rules, and in 2017 to let Italy shave off just 0.2 percent.

Near-term economic prospects brightened when first-quarter figures were hiked on Thursday, but the government's 1.1 percent growth forecast would be only around half the euro zone average.

"They have not been able to get growth going, so they should get the budget deficit down and then financial markets know over time the debt ratio can only fall," said Daniel Gros, head of Brussels-based think-tank CEPS.

"If you push the can down the road it gets more battered."

The details of a new electoral system to replace one widely deemed unworkable have yet to be thrashed out, and it is far from sure that elections will be brought forward from the natural end of the legislature next spring.

An unprecedented autumn vote could mean presenting the budget earlier than its traditional mid-October deadline and President Sergio Mattarella has signalled he would not dissolve parliament early unless public finances were secured.

Polls currently show no single party would win enough votes to govern Italy alone, with the ruling Democratic Party (PD) of former Prime Minister Matteo Renzi and the anti-establishment 5-Star Movement each wooing about 30 percent of Italians.

$1 = 0.8914 euros Reporting by Giuseppe Fonte and Isla Binnie; Editing by Catherine Evans

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