Italian government struggling with deficit, debt challenges

Italy to take on 40 billion euros in new debt to cover spending

Italian government struggling with deficit, debt challenges

Rome, March 21 - The Italian government Thursday raised its deficit targets and said it would also increase debt to help boost its flagging economy. The outgoing government, led by caretaker Premier Mario Monti, raised its deficit target for 2013 to 2.9% of gross domestic product - a dramatic increase from its earlier target of 1.8% of GDP. It also slashed its economic forecasts for 2013, predicting a 1.3% contraction, compared with an earlier prediction of a 0.2% fall in GDP. Next year will see an improvement, with Italy's economy expanding by 1.3%, Italian Finance Minister Vittorio Grilli predicted. That's slightly higher than a previous forecast of 1.1% growth in 2014. To meet all of its commitments, including social spending, the government announced plans to increase debt by 40 billion euros this year and next. "We will increase debt by 20 billion euros in 2013 and 20 billion euros in 2014," Grilli told reporters. The new money is expected to "stimulate" the recession-plagued Italian economy, added Grilli, whose government should soon be replaced by politicians elected in late February. However, a political logjam continues in Rome as the three parties that gained the most votes struggle to find some way to work together to form a new government. No single party gained enough power to control the new government and have been meeting Wednesday and Thursday with President Giorgio Napolitano to hash out a political compromise. The increase in debt was made possible after the European Commission (EC) in Brussels gave Italy more flexibility in its national debt levels despite a stability pact signed by nations including Italy that fixed those debt levels.

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