By Giada Zampano 

ROME -- Italy's government on Wednesday cut its already cautious growth forecasts for this year and next year while raising its budget deficit targets, a move that risks sparking new tensions with the European Commission over Rome's fiscal policies.

In its new economic forecasts, which are a first step in the process of making the 2017 budget, Prime Minister Matteo Renzi's government sees the Italian economy growing by only 0.8% this year and 1% in 2017, down from the previous forecasts of 1.2% for this year and 1.4% in 2017.

The budget deficit target, which is closely watched by the Commission, was raised to 2.4% of gross domestic product this year, from the previous 2.3%, and was increased to 2% from 1.8% in 2017.

Mr. Renzi and his finance minister, Pier Carlo Padoan, defended the government's new economic targets, saying they are fully in line with Rome's European commitments. The Italian government invoked two "extraordinary circumstances" -- the devastating earthquake that flattened towns in central Italy in August killing almost 300 people and the migration emergency -- to justify additional fiscal flexibility. The two emergencies will result in additional spending, which would increase the budget deficit target by an additional 0.4% in 2017, Mr. Renzi said.

Last year, the Italian budget has attracted criticism from the European Union, which is worried that the country -- one of the most indebted in the world -- is slowing the pace of its fiscal tightening. Italy's debt is the second highest in the eurozone after Greece, and is now seen growing to 132.8% of gross domestic product this year from 132.3% in 2015, while it is expected to fall to 132.2% in 2017.

In a press conference following the cabinet meeting that approved the new forecasts, Mr. Padoan said the debt-to-GDP ratio isn't falling this year because of lower-than-expected inflation. He also stressed that the government's privatization plans, aimed at slashing debt, were slowed down by difficult market conditions. "We don't want to sell off [public assets]," Mr. Padoan said.

Mr. Renzi confirmed that the new budget will include measures aimed at allowing workers over 60 to retire earlier, while also avoiding new tax hikes.

The Italian premier is under increased pressure to revive a moribund economy, ahead of a key constitutional referendum on Dec. 4 that could decide his political future. A defeat in the referendum could send the country into political upheaval given that Mr. Renzi's approval rating has fallen steadily as his economic measures failed to reignite growth.

Gross domestic product in Italy -- the eurozone's third-largest economy -- remained flat in the second quarter, with weak domestic demand and a contraction in the industrial sector putting at risk the already timid recovery expected for the second half of the year.

Italy's zero growth contrasted with a better-than-expected performance of Germany's economy, which grew 0.4% in the second quarter, highlighting Rome's role as a weak spot in Europe.

Write to Giada Zampano at giada.zampano@wsj.com

 

(END) Dow Jones Newswires

September 27, 2016 19:24 ET (23:24 GMT)

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