Italy to slash GDP forecasts on Friday, hike debt, deficit

By Gavin Jones

ROME (Reuters) - Italy's government will slash its forecasts for economic growth and raise its projections for the fiscal deficit and public debt when it issues new forecasts on Friday, according to officials and leaked documents.

According to the new figures, to be released after they are approved at a cabinet meeting, gross domestic product will shrink by around 1.7 percent this year, down from a forecast of -1.3 percent made in April. The meeting starts at 0800 GMT.

The forecast for next year will be cut to growth of "close to 1 percent" from 1.3 percent, one official said, remaining more optimistic than most independent economists.

The average forecast in a Reuters survey of analysts in July pointed to 2014 growth of 0.5 percent, while the International Monetary Fund in August forecast 0.7 percent.

The government will issue its new projections in the midst of fierce political tensions among the left-right coalition backing Prime Minister Enrico Letta that have called into question its ability to push through meaningful reforms.

Letta said on Thursday he would not allow his government to be used as a "punching ball" by the bickering parties as a new row erupted after centre-right leader Silvio Berlusconi attacked judges who sentenced him last month for tax fraud.

Economy Minister Fabrizio Saccomanni has said a drive to pay billions of euros in arrears owed by government to private suppliers could boost growth more than many forecasters expect.

The Treasury expects a "significant rebound" in growth in the fourth quarter of this year, one source said, ending Italy's longest post-war recession, which began in mid-2011.

On current trends the fiscal deficit will come in at 3.1 percent of GDP this year, according to the latest government projections, but Friday's document will pledge not to exceed the European Union's ceiling of 3 percent.

It remains unclear if the target will be revised to 3 percent from 2.9 percent at present.

What is certain is that next year's deficit target will be raised from the current goal of 1.8 percent. The new forecast is expected to be around 2.4 percent.

Perhaps of greatest concern is Italy's public debt, which is the second largest in the euro zone as a percentage of output and has risen steadily in recent years despite a decline in the budget deficit.

It is targeted to hit a new peak of 132.2 percent of GDP in 2014, according to a leaked Treasury document, up from a previous forecast of 129.0 percent.

This year's debt is also seen at around 132 percent, a new all-time record after the 127 percent level registered last year, and up from a previous forecast of 130.4 percent.

(Editing by Catherine Evans)