Italy hikes deficit targets, sees debt around 156% of GDP in 2021: sources

ROME (Reuters) - Italy is preparing to raise its budget deficit goals for this year and next and target public debt at around 156% of national output in 2021 because of the coronavirus crisis, two government sources told Reuters on Friday.

FILE PHOTO: A statue on the Fountain of Neptune is seen in front of an Italian flag on Palm Sunday, following the coronavirus disease (COVID-19) outbreak, in Naples, Italy April 5, 2020. REUTERS/Ciro De Luca

The Treasury will raise the target for the 2020 deficit to about 12.8% of gross domestic product from an 11.9% goal set a month ago. The 2020 debt should be near 160% of GDP, up from a previous estimate of 157.6%.

The new forecasts, still to be set as talks continue in the ruling coalition, will be published next week in the Treasury’s Economic and Financial Document (DEF), which forms the framework of the 2021 budget.

The DEF will target the deficit in 2021 at 7% of GDP compared with a previous projection of 5.7% set in April, the sources said, asking not to be named because of the sensitivity of the matter.

Italy has approved 100 billion euros ($116 billion) of extra borrowing this year in an effort to limit the damage done by COVID-19 to on its already fragile economy, now mired in its worst recession since World War II.

The DEF will forecast a 9% contraction in GDP this year, the sources said, revised from a -8% projection set in April.

It will pencil in growth of 6% for 2021, with the government expecting that a raft of expansionary measures to be financed by the European Union’s Recovery Fund will boost economic output.

Rome will get some 209 billion euros by 2023 in cheap loans and grants from the Fund, designed to help the EU nations hardest hit by COVID-19.

The growth performance of heavily indebted Italy has consistently underperformed its European partners over the past two decades, with a long tradition of missed GDP targets.

In a paper published this month, the government said Europe-funded projects could help the country double its average growth rate, narrow its north-south divide and even increase its birth rate - one of the lowest in the world.

($1 = 0.8596 euros)

Reporting by Giuseppe Fonte; editing by Gavin Jones, Larry King