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EU executive asks Italy to explain rising 2017 budget deficit

Italian Economy Minister Pier Carlo Padoan attends a news conference with the foreign press in Rome, Italy, August 4, 2015. REUTERS/Tony Gentile/File photo

By Jan Strupczewski BRUSSELS (Reuters) - The European Commission asked Italy on Tuesday to explain why its 2017 structural budget deficit is rising instead of falling as requested by EU finance ministers and why the headline budget gap is to be much higher than Rome promised in May. The letter from the European Union's executive arm to Italy's Finance Minister Pier Carlo Padoan is part of the Commission's responsibilities to check if the main assumptions of euro zone governments' budgets are in line with EU law. Italy, like all euro zone countries, is obliged to cut its structural deficit, which excludes one-off items and the effects of the business cycle, by at least 0.5 percent of GDP a year until it comes into balance or surplus. But in Rome's draft plan for next year, the structural deficit rises 0.4 percentage points to 1.6 percent of GDP, rather than falling 0.6 points to 0.6 percent of GDP as requested by EU finance ministers in July. In May, Italy wrote to the Commission promising its headline budget deficit in 2017 would be 1.8 percent of GDP, down from 2.4 percent expected in 2016. The 2017 assumptions most recently sent to the Commission, however, put the headline deficit at 2.3 percent. "We would need explanations for the revision of the targets and the substantial gap emerging with respect to the commitments made last spring," the Commission letter said. The Commission, which also sent letters with requests for clarifications to Spain, Portugal, Lithuania, Cyprus and Finland, said it understands the extraordinary nature of the costs that Italy was incurring for the recent earthquakes and migration inflows, but it needed more detail. "We would also need clarifications on amounts included in the Draft Budgetary Plan for consideration as 'exceptional expenditures'," it said. The letter is an embarrassment for Italian Prime Minister Matteo Renzi, who faces a referendum on Dec. 4 that may determine whether he stays in office. In 2015 and 2016, thanks to various clauses in the Stability and Growth Pact -- the EU's budget rules -- Italy got a total of about 19 billion euros, or 1.1 percent of GDP of extra budget leeway from the Commission. The Commission agreed Rome could spend the additional money rather than consolidate state books because it was to go on refugees, investment, security and propping up the economy in bad times. "Part of this flexibility, namely under the investment and structural reform clauses, was granted subject to Italy ... progressing with the structural reform agenda (and) ... presenting credible plans to resume the adjustment as of 2017," the Commission said. It gave Italy until Oct. 27 to reply. If the Commission is not satisfied with the explanations, it could reject the budget assumptions and ask for new ones, although this has never happened yet since the Commission got the powers in 2013. The Commission's doubts about draft budgets of the other countries mainly focused on insufficient planned reductions in the structural deficit, or, in the case of Cyprus, a sharp deterioration of the structural deficit by 1.9 percent of GDP. In the cases of Spain and Lithuania, which do not have fully operational governments at the moment, the Commission requested an update of the draft budgets as soon as a fully functional government is in place. (Reporting by Jan Strupczewski; Editing by Robin Pomeroy)