Italy hikes growth forecasts, deficit target ahead of election

By Giuseppe Fonte ROME (Reuters) - Italy on Saturday raised its forecasts for economic growth this year and next and said it would cut the budget deficit by less than previously promised. The brighter outlook may help the ruling Democratic Party ahead of national elections early next year if voters notice an improvement in living standards, though Italian growth continues to lag most of its euro zone partners. Gross domestic product (GDP) will rise by 1.5 percent in 2017, the Treasury said, raising its previous projection of 1.1 percent made in April to reflect better than expected data in the first two quarters and buoyant business sentiment. Next year, growth is expected to be 1.5 percent, according to the Treasury's Economic and Financial Document (DEF), up from the previous forecast of 1.0 percent. "Growth of 1.5 percent is pencilled in also for 2018 and 2019. These are forecasts that some people may regard as too optimistic, but I think they are totally justified," Economy Minister Pier Carlo Padoan told reporters after a cabinet meeting approved the document. The new forecasts are slightly more upbeat than those made last week by employers' association Confindustria, which estimates 1.5 percent growth in 2017 and 1.3 percent growth the following year. On Wednesday the Paris-based Organisation for Economic Cooperation and Development forecast Italian growth of 1.4 percent this year and 1.2 percent in 2018, compared with euro zone growth of 2.1 percent in 2017 and 1.9 percent in 2018. Despite the strengthening economy, the government of Prime Minister Paolo Gentiloni gave itself more spending room ahead of the election by raising the forecast for next year's budget deficit to 1.6 percent of GDP from 1.2 percent. The deficit would be lower than this year's goal of 2.1 percent, but the new 2018 target will still need the agreement of the European Commission, which may ask Italy to make more of a deficit-cutting effort. The government will present its 2018 budget next month and it must be approved by parliament by the end of the year. Padoan said that the budget would eliminate so-called "safeguard clauses", by which the government has promised the EU to either raise sales tax or find alternative means of reducing the deficit. That means the sales tax will not be raised next year. Brussels may not demand too much of Gentiloni ahead of the election, due by May 2018, fearing the rise of the anti-establishment 5-Star Movement which leads in most opinion polls and says it would sharply hike the deficit if it wins power. The Commission has allowed Rome to repeatedly raise its deficit targets in recent years, after negotiations that have normally resulted in a compromise. Brussels' main concern is Italy's huge public debt, which is the largest in the euro zone after Greece's and which successive governments have promised to bring down but failed to do so. The DEF set this year's debt target at 131.6 percent of GDP, slightly down from 132.0 percent last year, and said it would fall next year to 130 percent. (editing by Silvia Aloisi and Stephen Powell)