By Giuseppe Fonte and Gavin Jones
ROME (Reuters) - Italy is lobbying its European Union partners with increasing urgency to approve more flexible budget rules, according to government sources, as bond spreads widen and Rome fears that deviations from its 2024 spending targets will trigger a disciplinary procedure from Brussels.
Giorgia Meloni's government is particularly concerned that a future accounting ruling by the EU's statistics arm Eurostat could push up next year's fiscal deficit, three officials said, making Rome's position even more vulnerable.
The country's central bank later confirmed the risks linked to the upcoming Eurostat decision, to be made by mid-2024.
The EU's fiscal rules, suspended since 2020 due to the COVID-19 pandemic, are due to return next year with amendments now being negotiated by EU governments, and Italy is proposing ways to make it as lenient as possible.
These include favourable treatment of various types of investments as well as higher defence spending and financial and military aid to Ukraine.
Italy's latest proposal, the officials said, would shield it against a review by Eurostat in the coming months of how costly tax credits for green home improvements are accounted for.
Italy has already included them in past budgets, which has inflated its deficits for the last three years.
However Eurostat, using technical accounting criteria, may decide the impact of the tax credits should be shifted to 2024 and beyond, revising down deficits for the years when EU limits were suspended and increasing them when updated fiscal rules return.
The Bank of Italy warned parliament on Monday the Eurostat decision could lead to "a strong reduction in the deficits for 2020-2023 and a considerable increase in those for the following years."
In this case, Italy would almost certainly fall foul of a Stability Pact reform proposed by the European Commission - the most concrete on the table so far - so Italian officials are arguing that Eurostat's potential revisions should count as a "relevant factor" to avoid a disciplinary procedure.
The Commission has so far not commented on individual countries' proposals for Stability Pact reform, and was not immediately available for comment on this story.
Brussels is proposing to focus fiscal consolidation on net primary expenditure - excluding discretionary fiscal revenues, interest costs and cyclical spending on unemployment support.
The Italian Treasury has committed to keep Italy's net primary spending growth "well below" the 1.3% ceiling requested by Brussels for 2024.
But an unfavourable ruling by Eurostat would make this impossible, one of the officials said.
A Commission decision that Italy's 2024 budget is not compliant with EU rules would probably compound mounting market pressure on Rome's debt, which is proportionally the second-largest in the euro zone after Greece's.
Italy's budget framework, approved by the cabinet on Sept. 27, hiked next year's deficit goal to 4.3% from a previous 3.7% and targeted its return below the EU's 3% ceiling only in 2026, with virtually no debt reduction over the same period.
The plan was ill-received by markets, with the closely-watched gap between the yields on Italian 10-year BTP bonds and equivalent German Bunds exceeding 208 basis points on Monday, the widest since January.