Italy pushes back structural budget goal as recession bites

By Giuseppe Fonte and Roberto Landucci

ROME (Reuters) - Italy faces a third consecutive year of economic contraction in 2014 that will slow efforts to bring its budget into balance, Economy Minister Pier Carlo Padoan said on Tuesday.

Padoan confirmed that the government expected economic output to decline by 0.3 percent this year, before growing just 0.6 percent in 2015. The government had previously forecast growth of 0.8 percent in 2014 and 1.3 percent in 2015.

He said Rome would respect European Union budget limits with a deficit-to-GDP ratio of 3 percent in 2014, just in line with EU limits and would improve the ratio slightly to 2.9 percent next year.

However, the aim of bringing the budget into balance in structural terms, adjusted for the effects of the business cycle, would be delayed by a year until 2017.

He said the worsening outlook would allow Italy, the euro zone's third-largest economy, to use stipulations in European legislation that allow countries more flexibility on some targets when facing "exceptional circumstances".

"This means that under European rules it is legitimate to project a slowdown in adjustment of the structural balance," he told reporters.

The new projections, most of which had already been leaked, underline the struggle facing Prime Minister Matteo Renzi as he tries to pass a package of labour reforms that are being resisted by unions and elements of his own centre-left party.

Padoan said privatisation revenues, which the government is counting on to help reduce the public debt, would be slightly below target this year but the shortfall would be made up in subsequent years.

There was no change to the medium-term target of privatisation revenues averaging 0.7 percent of GDP annually over a three year period, he said.

The public debt would reach 131.6 percent of GDP this year and 133.4 percent of GDP next year.

Italy slipped back into its third recession in six years in the second quarter and statistics agency ISTAT forecast that third quarter GDP would also contract, with inflation close to zero.

Economic output shrank 1.9 percent in 2013 and 2.4 percent in 2012,

Earlier on Tuesday, ISTAT reported that consumer prices fell for the second month in a row in September, declining by 0.2 percent on an annual basis, increasing the risk of a deflationary spiral developing that would make cutting the huge public debt even more difficult.

(Writing by James Mackenzie; Editing by Crispian Balmer)