Italy's Renzi snubs Brussels over budget, takes swipe at Germany

* Renzi faces crucial reform referendum in December

* Budget proposal hikes previously agreed targets

* Brussels considering sending Rome a warning letter

* Economy minister plays down impact of referendum outcome (Adds Renzi after EU summit)

By Gavin Jones and Francesco Guarascio

ROME/BRUSSELS, Oct 21 (Reuters) - Italian Prime Minister Matteo Renzi said on Friday he would not change his 2017 budget plan even if the European Commission says it breaches EU rules on fiscal consolidation and took a swipe at Germany over its own economic policies.

Renzi last week unveiled an expansionary budget ahead of a referendum on constitutional reform that may decide his political future, hiking previously agreed targets for the budget deficit and the public debt.

The Commission has numerous concerns about the plan and is considering sending Rome a warning letter, officials have said.

Renzi's response on Friday was that he would not be swayed by EU "technocracy".

"The budget law will not be changed," he said in a radio interview when asked about the Commission's doubts. "We want to address the needs of Italian citizens, not Brussels technocracy."

He was even more defiant at a later news conference following an EU summit in Brussels, saying the Commission should look instead at Germany's huge trade surplus which he said was hurting the rest of the euro zone.

"I think Germany's budget has many problems including a trade surplus that is against all European rules," Renzi said.

He also said that Eastern European countries who fail to respect their commitments to take in migrants should be sanctioned by the Commission and have their EU funding cut.

Italy's budget widens next year's fiscal deficit target to 2.3 percent of gross domestic product from the 1.8 percent goal that Italy itself pledged in a letter to the Commission in May. Before that it had forecast a 1.1 percent shortfall.

Parliament needs to pass the budget into law this year.

However, economy Minister Pier Carlo Padoan on Friday played down talk of a dispute with Brussels.

"The Commission has expressed no scepticism" over the budget, he said at an event at a university in Frankfurt. "We are following a normal procedure that will unfold in the next few days on the evaluation of specific measures."

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Opinion polls suggest Renzi may lose the Dec. 4 referendum on his plan to reduce the role of the Senate and centralise decision making. But he has packed the budget with potentially vote-winning measures.

It abolishes an unpopular state tax collection agency, raises pensions and offers an amnesty for tax dodgers who declare cash previously hidden from the authorities. It also scraps interest and penalties on unpaid fines.

Renzi, who has promised to resign if he loses the referendum, has also become increasingly vocal in criticising the EU's "old and absurd" fiscal rules which many Italians blame for the country's chronically weak economic growth.

Padoan said the repercussions of a "no" victory in the referendum should not be exaggerated.

"Financial markets have this idea that the referendum is the end of the world. Well, it is not. In the unfortunate case that the no-vote prevails, the country will continue to reform."

EU rules require governments to slim down their structural deficits - funding shortfalls once the effects of business cycles and one-off bills are set aside - by 0.5 percent of GDP a year until their books are in balance or in surplus.

But rather than cut its structural deficit, Italy plans to widen it next year to 1.6 percent of GDP from 1.2 percent in 2016.

The Commission is also concerned about Italy's public debt, which at 133 percent of GDP is the largest in the EU after Greece. Its debt has risen steadily for years despite repeated promises from Rome to get it on a downward path.

Despite Rome's shaky public finances, officials in Brussels and other European capitals see Renzi as the best hope for stability and reform in Italy and are reluctant to do anything to hurt him ahead of the referendum.

An EU official said on Wednesday that Brussels has still not decided whether to send a letter to Italy over the budget.

(Additional reporting by Francesco Canepa in Frankfurt Editing by Louise Ireland)