A deeper-than-expected recession is hurting Italy's public finances but it can still keep the budget deficit below 3 percent of output without more fiscal tightening, Economy Minister Fabrizio Saccomanni said on Thursday.
Saccomanni, a former Bank of Italy official, said in parliament that the economic slump was weighing on tax revenues and in particular sales tax, as consumer spending slumps.
However, when asked if corrective measures would be needed to meet this year's deficit target of 2.9 percent of gross domestic product, just a notch below the EU ceiling, he told Reuters: "I don't think so."
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Data so far this year point to a sharply widening fiscal gap, fuelling concerns that the deficit could significantly exceed last year's level of exactly 3 percent.
Prime Minister Enrico Letta is struggling to balance Italy's commitments to the EU with coalition promises to cut taxes.
At the insistence of Silvio Berlusconi's centre-right, a crucial part of the ruling coalition, Letta has suspended a housing tax on primary residences and is also under pressure to block an increase in sales tax due to take effect next month.
But Saccomanni said scrapping the housing tax on first homes altogether and permanently blocking the sales tax increase would cost 8 billion euros ($10.6 billion) per year.
"That would require severe measures to compensate the shortfall and these cannot be found at the moment," he told the Senate. He said the government would do all it could to avoid or delay the hike in sales tax, but he could not guarantee it.
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The European Central Bank said in its monthly bulletin on Thursday it was "crucial" that Italy hold the deficit below 3 percent, warning of risks deriving from recession's impact on tax revenues and spending.
"Yes, absolutely," Saccomanni said when asked if the 2.9 percent goal would be met. He added that he had "already reassured the ECB."
The pressure on the Letta government has yet to seriously perturb financial markets. However, Italy's 3-year borrowing costs reached the highest level since March at an auction on Thursday, part of a widespread retreat from riskier assets in the wake of central bank stimulus doubts.