Italy will delay by a year its plan to balance the budget in 2013 due to a weakening economic outlook, according to a draft document due to be approved by the cabinet of prime minister Mario Monti today.
The draft Economic and Financial document (DEF), which has been obtained by Reuters, raises the budget deficit forecasts for 2012-2014 and slashes this year's economic growth outlook.
Italy's budget deficit is already one of the lowest in the euro zone as a proportion of output and many economists say its chronically weak growth is more of a concern than fiscal slippage.
Under former prime minister Silvio Berlusconi, Italy promised its European partners last summer that it would balance its budget in 2013, bringing forward the previous 2014 target to try to reassure markets as Italian bond yields surged.
Now Mr Monti's technocrat government is poised to revert to the old 2014 target as the economy contracts sharply, weighed down by a series of austerity measures approved to accelerate deficit reduction.
Mr Monti was hailed as a saviour when he replaced Mr Berlusconi in November as Italy appeared to be heading towards a Greek-style debt crisis, but his popularity is declining and his reforms are drawing rising criticism and resistance.
A similar move by Madrid earlier this year to weaken its deficit target sent yields on Spanish debt sharply higher.
However, Spain's deficit is much larger than Italy's and is considered to be a bigger problem.
Mr Monti still enjoys enormous credibility internationally and the revised deficit targets are unlikely to disturb markets that are now more concerned about the danger of excessive austerity, said Nicholas Spiro from Spiro Sovereign Strategy.
"Berlusconi could have promised a balanced budget this year and people would have just laughed, while Monti can promise it in three years and he is still credible," Mr Spiro said.
"I don't believe that a decision to be less aggressive on the fiscal front is a concern for a country like Italy."
The draft DEF raises the 2012 deficit target marginally to 1.7 per cent of gross domestic product from 1.6 per cent, while the 2013 goal is raised to 0.5 per cent from 0.1 per cent.
The nearly balanced budget, with a 0.1 per cent deficit, is now targeted in 2014. The economy is forecast to contract 1.2 per cent this year, according to the document, compared with a 0.4 per cent decline in GDP projected by Mr Monti's government in December.
Reuters
