Italy follows Spain in delaying deficit reduction

Rome - Italian Prime Minister Mario Monti pushed back his balanced-budget goal amid a deepening recession, six weeks after Spain helped reignite Europe's debt crisis by abandoning its deficit target.

The Italian government, which had vowed to balance the budget in 2013, now expects a shortfall of 0.5 percent of gross domestic product next year, the Cabinet said after meeting Wednesday to revise its three-year economic plan. The deficit of 0.1 percent previously estimated for 2013 won't be reached until 2014.

"While much progress has been achieved, there's still a long way to go" to reorder public finances, the Cabinet said. The new plan forecasts the economy will shrink 1.2 percent this year, more than double the 0.5 percent contraction predicted in December, before returning to growth of 0.5 percent in 2013.

"The financial crisis is exacting a huge price on Italian families and young people," Monti said after the Cabinet meeting.

Italy's backpedalling on its fiscal objectives raises fresh concerns over Europe's recipe of enacting austerity measures in the face of a recession. Monti pushed through a 20 billion-euro ($26 billion) austerity plan in December to shield the economy from the debt crisis, though the effort helped tip Italy into its fourth slump since 2001. Spain, which has passed about 40 billion euros of spending cuts and tax rises since December, is mired in a deepening contraction amid the highest jobless rate in Europe.

Bond yields for both countries, which had fallen after an injection of 1 trillion euros into the banking system by the European Central Bank, have surged since Prime Minister Mariano Rajoy announced on March 2 that Spain wouldn't meet its deficit goal this year.

Italy's economy probably shrank for a third straight quarter in the three months through March, the Bank of Italy said Tuesday, complicating efforts to reduce debt. The government's economic plan today forecasts the euro-region's second biggest debt burden will rise to 120.3 percent of GDP this year from 119 percent in 2011.