By Gavin Jones
ROME (Reuters) - Italy said on Tuesday the European Commission had approved its 2016 budget with a fiscal deficit target of 2.3 percent of gross domestic product, ending protracted negotiations between Brussels and Rome.
The Italian Economy Ministry published a letter sent to it by the Commission granting Italy most of the budget flexibility it had requested for this year, but warning that Rome needs to take additional belt-tightening measures in 2017.
The "flexibility", or licence to increase its previously agreed deficit goal in 2016, amounted to 0.85 percent of GDP, or around 14 billion euros ($15.87 billion), the letter said.
"It must be recalled that no other (EU) member state has requested nor received anything close to this unprecedented amount of flexibility," it said.
The Commission is due to release its official decision in a report to be published on Wednesday.
The EU executive had warned at the end of last year that Italy's budget, which hiked the 2016 deficit target to 2.4 percent of GDP from 1.8 percent, risked breaking the EU's fiscal rules and deferred a final decision until May.
In the meantime, Rome made a slight concession by trimming the target to 2.3 percent, which the Commission said was enough in view of the government's efforts to reform its economy, increase much-needed investments and handle a migrant crisis.
"The Commission has granted us an element of flexibility. It's less than I would have wanted and it's not the solution to all our problems but it's a principle of flexibility," Prime Minister Matteo Renzi said at a conference in southern Italy.
EYES ON 2017
Renzi, who has repeatedly clashed with Brussels over what he sees as the Commission's excessive insistence on fiscal rigour, thanked Economy Minister Pier Carlo Padoan for "extraordinary work" in negotiating over the last few months.
However, having allowed Italy to soften its original deficit cutting commitments in each of the last two years, the Commission said Rome had to do more to lower the deficit to 1.8 percent of GDP as promised in 2017.
It said the policies planned by Italy were likely to reduce the structural deficit, adjusted for the business cycle, by no more than 0.35 percent of GDP, but that measures of at least 0.5 percent were required.
"It is crucial for the Commission that Italy stands ready to take action ensuring that this projected gap does not materialise," the letter said.
Meeting its 2017 deficit target will require spending cuts or tax hikes of some 15 billion euros, a tough task for Renzi, whose popularity has fallen steadily over the last year, according to opinion polls.
Italy's deficit has not exceeded the EU's 3 percent of GDP ceiling since 2012 and is below that of France, Spain and several other euro zone countries.
However, the Commission says more decisive deficit reduction is required in Italy's case because of its huge stock of debt, which has risen steadily over the last eight years.
Italy's debt-to-GDP ratio, at 132.8 percent last year, is the highest in the 19-nation euro zone after that of Greece.
The government has targeted it to fall marginally to 132.4 percent this year, but many economists expect that goal will be exceeded due to persistently sluggish economic growth.