Exclusive: Italy cuts 2019, 2020 GDP growth forecasts - sources

ROME (Reuters) - Italy’s new government expects the economy to expand by only about 0.4% next year after eking out 0.1% growth this year, three sources close to the matter told Reuters, underscoring the need for an expansionary 2020 budget.

In April, the previous government of the anti-establishment 5-Star Movement and the right-wing League had targeted gross domestic product growth of 0.2% this year and 0.8% in 2020.

The new forecasts, which are based on an unchanged policy scenario, will provide the framework for the budget which must be presented to the European Commission next month.

The budget is expected to contain tax cuts and other growth-enhancing measures which will lead to a somewhat higher 2020 GDP forecast than the one drawn up under the unchanged policy scenario, the sources said.

Next year’s budget deficit is likely to be targeted at about 2.3% of GDP, government sources told Reuters last week, up from 2.04% this year. [L5N2614FV]

The Treasury has still not finalised its growth projections, which must be formally presented to parliament by Sept. 27. The 2020 one, could be marginally revised, the sources said. One said that any revision was likely to be down to 0.3% rather than up to 0.5%.

The Treasury was not immediately available to comment.

The unchanged-policy forecast incorporates the negative impact of an increase in sales tax due to kick in from January but which the new government of 5-Star and the centre-left Democratic Party (PD) has promised to avoid.

The value-added tax hike pencilled in by the previous coalition would see the main rate rise to 25.2% from 22%.

The new government says it would hurt already weak consumer spending and domestic demand and must be scrapped.

Deputy Economy Minister Antonio Misiani said on Tuesday that avoiding the VAT rise would increase growth next year by 0.3 or 0.4 percentage points.

The European Commission forecast in July that Italy would post growth of 0.1% this year and 0.7% in 2020, which would make it the slowest-growing EU economy in both years.

The Italian economy has been broadly stagnant for the last five quarters. In the second quarter, GDP was flat from the previous three months and down 0.1% on a year-on-year basis.

Reporting by Giuseppe Fonte and Gavin Jones; Editing by Hugh Lawson