By Jan Strupczewski
BRUSSELS (Reuters) – Italy should cut its fiscal deficit and public debt as priorities while its economic growth, while slowing, is still above potential, the International Monetary Fund warned on Thursday.
Rome is stuck in a bitter dispute with the European Commission over its proposed 2019 budget, which sees a sharp rise in the budget deficit to cover promises of increased public spending, tax cuts and a reduction in the retirement age.
Currently over 130 percent of gross domestic product, Italian debt is the second highest in Europe after Greece and Rome has the highest cost of debt service in the European Union.
"Countries should prioritize measures to reduce the fiscal deficit toward their medium-term goals and lower debt," the IMF said in a regional report on Europe.
"The urgency is greatest in countries with significant vulnerabilities, such as Italy and Turkey."
Italy's populist government argues that the highest deficit, at 2.4 percent of GDP, from 1.8 percent this year, will help boost economic growth to 1.5 percent next year, 1.2 percent in 2018, and to 1.6 percent in 2020.
The European Commission believes that these growth forecasts are very optimistic and the projected, albeit very high, deficit will be even greater if growth is below forecast.
The IMF has adopted a similar view, predicting that Italy's GDP growth will be only 1.0 percent in 2019 and 0.9 percent in 2020.