Italy vows rigour in strategy to change EU fiscal rules

ROME (Reuters) - Italy's new government on Tuesday gave its clearest indication yet that it plans to push for an easing of European Union fiscal rules after convincing its EU partners that Rome will keep a lid on public finances and reform the stagnant economy.

Presenting revised macro-economic targets that they characterised as showing fiscal rigour, Prime Minister Matteo Renzi and Economy Minister Pier Carlo Padoan said Italy would make a review of the EU's budget rules an objective of its six-month European Union presidency, which begins in July.

Their statements suggests France will have an ally as it pushes for more time to lower its own budget deficit, and as the EU debates the need to switch its focus away from austerity towards growth and job creation.

"Do we want to stick to the figures in order to change European rules? In a certain sense that is true," Padoan told reporters after the cabinet approved Italy's so-called Economic and Financial Document (DEF) containing new targets for coming years.

The government cut its economic growth forecast for this year to 0.8 percent from 1.l percent, still higher than that of most economists, and marginally raised its deficit target to 2.6 percent of output from 2.5 percent.

Renzi, who took office in February in an internal coup in his Democratic Party, backtracked from a plan to significantly increase borrowing to help fund 6.7 billion euros of tax cuts this year after an icy reception from the European Commission.

But the 39-year-old former mayor of Florence who has described the EU's 3 percent-of-GDP deficit cap as "anachronistic", denied he had given up his plan to change European budget rules.

"We want to change the direction of Europe more than ever," he said. But he added that Italy would be in a stronger position to do this if it kept its finances in line at the moment.

Despite Renzi's and Padoan's declarations of rigour, their new targets actually entail some fiscal slippage and may be frowned upon by the European Commission.

The government raised its 2015 deficit target to 1.8 percent from 1.6 percent of GDP. It targeted a structural budget deficit, adjusted for the business cycle, of 0.6 percent this year, up from 0.3 percent.

The Commission had already asked Italy to take corrective action to ensure its structural budget deficit, be brought close to zero this year.

RISING DEBT

Moreover the DEF targets Italy's public debt, the second highest in the euro zone after Greece's, at a new record of 134.9 percent this year, up from a previous goal of 132.8 percent.

Renzi said his pledge to reduce income tax on low earners by 6.7 billion euros this year, which translates into about 80 euros a month for those concerned, would be fully funded by 4.5 billion euros of spending cuts and 2.2 billion euros of extra revenues from sales tax and capital gains tax on banks.

He offered no details on the spending cuts, which are being worked out by Carlo Cottarelli, a special commissioner on public spending drafted in from the IMF.

The sales tax boost is expected to come as a result of the government's pledge to pay some 68 billion euros of arrears owed by public bodies to private sector suppliers. The banks will have to pay a higher tax rate on their revalued stakes in the central bank.

Last year Italy increased the value of the Bank of Italy's share capital to 7.5 billion euros from 156,000 euros, a level that had not been changed since the 1930s.

The news conference was short on detail and the economic forecasts confirmed previous leaks but Renzi, a highly effective communicator, gave his usual spirited television performance.

He promised a pay ceiling of 238,000 euros per year on public sector managers and said his tax cuts were "an extraordinary way of restoring a bit of confidence to Italians" and would help the country to shake off two decades of recession and stagnation.

"Italy can make it. The chorus that we will never pull through and we are condemned to decline is not true," he said.

Renzi is enjoying a honeymoon period with Italians who have warmed to his dynamism and quick-fire, informal communication style.

His Democratic Party commands more than 30 percent of the vote in opinion polls, giving it a comfortable lead over the anti-establishment 5-Star Movement and Silvio Berluconi's Forza Italia, each of which has less than 25 percent.

But Renzi must still tread carefully. He has many enemies in his own PD party and among trade unions, and his popularity could easily evaporate if and when he takes tough decisions that threaten public sector jobs and vested interests.

(Additional reporting by Naomi O'Leary and Roberto Landucci; Writing by Gavin Jones; Editing by Alessandra Galloni and Robin Pomeroy)

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