By Giuseppe Fonte

ROME (Reuters) -Italy on Tuesday raised its growth forecast for 2023 but cut next year’s projection as the outlook clouds, while confirming previous public finance targets to keep the budget deficit on a downwards trend.

In its Economic and Financial Document (DEF), the Treasury forecasts gross domestic product (GDP) to grow by 1% this year, up from a 0.6% projection last November.

The growth rate would be 0.9% under an unchanged policy scenario, the Treasury said in a statement. The final target is slightly higher as Rome plans to approve tax cuts to support the purchasing power of Italian families and boost domestic demand.

Looking further forward, the negative impact of rising interest rates set by the European Central Bank (ECB) to curb inflation is making prospects for 2024 deteriorate.

The government set a GDP growth target of 1.5% next year, down from the previous 1.9%.

Economy Minister Giancarlo Giorgetti said in a statement that the new targets were a sign of “responsible ambition.”

Early this month he said higher interest rates could pose a threat to growth, in an implicit criticism of European Central Bank (ECB) policy.

The DEF targets inflation, measured using the EU-harmonised consumer prices index (HICP), at 5.4% this year, a draft of the document seen by Reuters showed, down from 8.7% in 2022.

Under current trends it is seen falling to 2.8% in 2024.

TAX CUTS FOR EMPLOYEES

Another key issue affecting the economic outlook is Italy’s ability to catch up with the European Union’s post-COVID recovery funding programme.

Rome is due to receive roughly 200 billion euros ($217.92 billion) in grants and cheap loans through 2026, but the government is falling behind both on targets and milestones agreed with Brussels in return for the aid, and on spending money already received.

Giorgetti reiterated in the statement Rome was seeking more time from EU authorities to spend the funds.

On the public finance front, the government confirmed its 2023 budget deficit target at 4.5% of national output, helped by the fact the deficit is on course for a slightly lower 4.35% under current trends.

That allows potential leeway worth more than 3 billion euros which Rome will use to cut taxes paid by employees with low to middle incomes.

Last year, Italy reported a budget gap of 8% of GDP, but Rome is gradually phasing out the strongly expansionary policy adopted since 2020 to soften the impact of the pandemic and an energy crisis exacerbated by Russia’s invasion of Ukraine.

After declining to a projected 3.7% of GDP next year, unchanged from November, the deficit is seen returning to the European Union’s 3% ceiling in 2025 and falling to 2.5% the following year.

Italy’s public debt, proportionally the highest in the euro zone after Greece, is targeted in the DEF at 142.1% of GDP this year, down from a previous 144.6%, and is set to decline to 141.4% in 2024 and to 140.4% in 2026.

($1 = 0.9178 euros)

(Editing by Gavin Jones and Chizu Nomiyama)

---