Renzi gambles on EU backing Italy bumper budget

Italian Prime Minister Matteo Renzi on Friday presented his cabinet with a draft budget which could inject 27 billion euros into the country's sickly economy next year -- if he can get it past Brussels.

The plan for an ambitious programme of tax cuts and investment financed partly through an increased deficit represents Renzi's biggest challenge yet to the way in which the European Commission applies the eurozone's supposedly strict budget rules.

Economists are sceptical that Renzi will be granted the leeway he wants, which he says could potentially free up some 17 billion euros ($19.3 billion) for measures to promote jobs and growth.

"Brussels will allow some fiscal slippage, but not 17 billion euros," Holger Schmieding, chief economist at Berenberg Bank, told AFP.

But the centre-left premier bullishly insists that his plans are both within the rules and vital to secure the growth Italy needs to put its public finances in order.

"We cannot cut the deficit purely by cutting spending, that is foolish," he said earlier this week.

On top of the funds released by the EU rules being applied flexibly, Renzi is counting on higher growth to finance his plans.

The budget presented to the coalition government Friday evening includes revised GDP growth predictions of 0.9 percent for this year and around 1.6 percent for 2016.

Pierre Moscovici, EU economics affairs commissioner, was in Rome on Friday to begin the haggling over the detail of the Italian tax and spending plans.

There is concern in Brussels that Renzi's widely-trailed plans will slow the pace at which Rome reduces its 2.2-trillion-euro debt mountain -- equivalent to more than 130 percent of the country's entire annual economic output.

- Respect the rules -
Moscovici diplomatically rejected suggestions that Renzi was regarded as the naughtiest boy in the euro class.

"Firstly there have been reforms in Italy, which are bearing fruit, notably in the labour market. This is positive and has to be taken into account

"Secondly, in the Stability and Growth Pact (EU rules) there is provision for flexibility which Italy has already benefited from. We will see under what conditions it can continue to benefit from this or even request further flexibility.

"At the same time, let us be aware that we have to respect the rules, all the rules. It is in that spirit that I am negotiating, with the desire to reach an accord."

Italy said earlier this year that it would aim to bring its deficit down to 1.8 percent of GDP in 2016.

But Renzi has now jettisoned that target in order to fund a fiscal giveaway involving the abolition of a loathed tax on primary residences as well as charges on municipal services and farm buildings.

Officials in Brussels question whether these politically popular measures are the most efficient use of public finances to fuel growth.

"I don't want to comment on internal Italian politics," Moscovici said. "But tax cuts must be the most economically efficient and for the Commission that is through a reduction in labour costs. And in any case, where there are tax cuts, there must also be corresponding cuts in public spending."

- Growth the priority -
Renzi aides say the tax cuts should be seen as part of a broader 2013-18 programme designed to ease Italians' total tax burden by some 50 billion euros -- the bulk of which will involve reductions in corporate and payroll taxes.

Economists expect the 2016 measures envisaged by Renzi to result in the deficit for next year coming in around 2.2 percent.

This is comfortably under the EU's three percent ceiling but means the reduction in Italy's debt level is likely to be very marginal -- and may not happen if growth turns out to be weaker than the government anticipates.

The European Central Bank this week criticised Italy for failing to use its recent windfall gains from lower debt servicing costs to cut its deficit.

But Renzi maintains the priority has to be growth in an economy which has barely expanded in the last decade and a half.