By Gavin Jones and Giuseppe Fonte
ROME (Reuters) - The Italian government slightly raised the country's budget deficit target for 2020 on Monday, looking to head off a programmed hike in value-added taxes while avoiding renewed tensions with the European Union.
The new coalition, which includes the anti-establishment 5-Star Movement and pro-European Democratic Party (PD), is set to unveil its first budget next month which will be based on an array of new forecasts agreed by the cabinet.
The latest figures point to growth of 0.1% this year, down from a previous goal of 0.2%, with output seen at a meager 0.6% in 2020 compared to a previously forecast 0.8%, the Treasury's Economic and Financial Document said.
The cabinet said the budget deficit would come in at 2.2% of gross domestic product (GDP) next year compared with 2.1% in the last such document released in April.
The structural deficit, which is stripped of growth fluctuations and is closely watched by Brussels, is forecast to rise to 1.4% of GDP in 2020 from 1.2% this year -- in defiance of EU rules which call for the number to decline progressively toward zero.
In July, the European Commission urged Italy to reduce the structural deficit by 0.6 points next year.
The previous Italian government, which included the euroskeptic League party, clashed ferociously with Brussels last year when it pledged to hike the 2019 deficit to 2.4% of GDP as it sought to boost welfare spending.
However, the League is not in the new coalition and Economy Minister Roberto Gualtieri said on Monday he hoped to have a "constructive dialogue" with Europe over the budget, avoiding the sort of inflammatory language that so riled EU officials in the past.
TAX EVASION
Much of the deficit in the forthcoming budget will be used to head off an automatic increase in value-added sales taxes (VAT), that had been due to come into force in January and was meant to raise some 23 billion euros ($25.2 billion) to ensure Italy complied with EU fiscal rules.
Economists warned such a hike could have snuffed out Italy's timid growth and the new government, which took office last month, said avoiding the VAT rise was a priority.
Italy's debt, proportionally the second highest in the euro zone after Greece's, is forecast to rise to a new peak of 135.7% this year, before declining to 135.2% in 2020.
Last year's ratio came in at 134.8%.
Heavily indebted Italy has consistently underperformed its European partners over the past two decades and successive governments have promised to reverse the trend through multiple reform programs. These have mostly failed.
The latest administration has said it will focus on battling tax evasion and look to raise a hefty 7 billion euros from a new crackdown next year. As part of this plan, it aims to introduce measures to encourage people to use easily traced credit cards rather than resort to opaque cash transactions.
"We will never solve structural problems in this country unless we overcome tax evasion. The government will be very serious on this issue," Gualtieri said.
He added that the coalition also wanted to promote environment-friendly policies and would issue so-called Green Bonds to pay for various projects.