By Giuseppe Fonte and Gavin Jones

ROME (Reuters) -Italy’s new government unveiled its first public finance targets on Friday, hiking borrowing to finance support measures for families and firms struggling with sky-high energy costs.

The Treasury’s annual Economic and Financial Document (DEF) approved by Giorgia Meloni’s cabinet set the 2023 fiscal deficit at 4.5% of gross domestic product, up from a 3.4% forecast made in September by the previous government of Mario Draghi.

The new figures give Meloni room for measures worth around 1.1% of GDP to expand the economy next year, while keeping the deficit-to-GDP ratio on a downward trajectory from one year to the next.

This year’s ratio is hiked to 5.6% from 5.1%, allowing Meloni, who took office last month at the head of a conservative coalition, to immediately take steps to tackle the problem of surging gas and electricity bills.

She told reporters she would spend more than nine billion euros on an anti-inflation package in a decree next week.

“For 2023 …we are freeing up 22 or 23 billion which will also be used exclusively to address the energy question,” she said at a news conference.

After winning a Sept. 25 election the hard-right leader quickly made clear that most of her coalition’s more ambitious election pledges such swingeing tax cuts and higher pensions would have to wait until better economic times.

The government raised Italy’s GDP growth forecast for this year to 3.7% from 3.3% on the back of stronger expected expansion in the third quarter, while leaving the 2023 forecast unchanged at 0.6%.

Economy Minister Giancarlo Giorgetti, speaking at the same news conference, said recession risks were growing in Europe “and could also touch the Italian economy.”

RECORD INFLATION

The Treasury’s targets will form the framework for the 2023 budget that Meloni will present to parliament this month for approval by the end of the year.

Public finances this year have gone better than forecast, with value added tax revenues and excise duties boosted by inflation and surging energy prices.

Inflation, which under the EU-harmonised index hit 12.8% in October and marked the highest reading since the series was introduced in 1996, has also helped cut Italy’s huge public debt.

Moreover, the European Union’s fiscal rules are still suspended to help the bloc’s economies recover from the COVID-19 pandemic, giving Meloni valuable breathing space.

The DEF projected the deficit to decline in 2024 and said in 2025 it would fall to 3.0%, the ceiling set by the EU’s Stability Pact before it was suspended.

Giorgetti said Italy’s public debt, proportionally the highest in the euro zone after Greece’s, will fall steadily from the 150.3% of GDP level registered in 2021 to 141.2% in 2025. Figures for the intermediate years were not immediately available.

($1 = 1.0091 euros)

(Editing by Alison Williams)

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