The European Commission on Friday slammed Italy's decision to scale back plans to cut its budget deficit, saying they were limited and would have a knock-on effect on the country's towering debt pile.
EU Monetary Affairs Commissioner Joaquin Almunia expressed his "deep concern about the limited consolidation planned for 2008 and the subsequent years" which broke deficit-cutting commitments by finance ministers taken in April.
"This will slow down the reduction in the public debt level, still significantly above 100 percent of GDP," Almunia said. The statement came a day after Italy announced a mid-term economic plan that raised the 2007 budget deficit target to allow extra public spending, demanded by leftists in the ruling coalition. This year's deficit is now set to come in at 2.5 percent of gross domestic product (GDP), rather than 2.3 percent originally planned, before falling to 2.2 percent in 2008 and 1.5 percent in 2009.
Economy Minister Tommaso Padoa-Schioppa hinted that he might have a tough time explaining the new deficit targets to the European Commission, which oversees the budget rules that are supposed to underpin the euro currency.
Italy's economic plan, known as the DPEF, forecast its ratio of debt to GDP at 105.1 percent this year, 103.2 percent next year, and 98.3 percent in 2010. "Interest payments on this debt, at over 68 billion euros ($91.4 billion) in 2006, absorb nearly 5 percentage points of the Italian GDP, an amount twice as high as public investment, constraining resources which otherwise could be used more productively," Almunia said in his statement.
He also noted "uncertainty persisting" about Italy's pension system and said any changes to existing laws should be budget-neutral over the medium to long term and not worsen the long-term sustainability of public finances.
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