Italy pledges responsible budget policy after EU disciplinary step

G7 Finance Ministers and Central Bank Governors' Meeting in Italy

By Giuseppe Fonte and Gavin Jones

ROME (Reuters) - Italy will take a "responsible" approach to its budget policy, Economy Minister Giancarlo Giorgetti said, after the European Commission recommended disciplinary budget steps against Rome along with six other countries over their high fiscal gaps.

The EU announcement on Wednesday came with Italy under close market scrutiny.

The yield gap between Italian and German bonds - a gauge of the risk premium investors seek to hold Italian debt - has widened since European elections this month showed rising support for eurosceptics and nationalists.

"We are aware that, given the context we find ourselves in, it is necessary to maintain a responsible approach in planning and managing budget policy," Giorgetti said at an event in Rome.

Italy's 2023 deficit came in at 7.4% of GDP, the highest in the euro zone, pushed up by costly government incentives for energy saving building work. Rome plans to bring the fiscal gap below the EU's 3% limit only in 2026.

The infringement procedure obliges Italy to cut its structural budget deficit -- net of one-off factors and business cycle fluctuations -- by at least 0.5% of GDP per year.

However, the Treasury has previously said Italy is already on track to meet the EU requirements, as its latest multi-year budget projections factor in an average annual reduction in the structural deficit of around 0.7% of GDP through 2027.

"The deficit goals are those we have indicated in our budget path, which we intend to respect," Giorgetti said, adding Rome wants to extend to 2025 temporary tax cuts for employees with low to middle incomes currently in place until December.

Italy now needs to negotiate a fiscal adjustment with Brussels that adheres to the excess deficit procedure and complies with the latest reform of EU's two-decade-old fiscal rules.

The new rules set a slow but steady pace of deficit and debt reduction from 2025 over four to seven years, with the longer option available if a country undertakes reforms and investments in areas the EU prioritises.

Italy has repeatedly said it wants a seven-year adjustment path.

Being placed under a deficit reduction procedure carries the advantage for Italy that it temporarily shields it from an EU requirement that it reduce its debt by a minimum of 1 percentage point per year.

On the other hand, countries under such a procedure may not be automatically eligible for the European Central Bank's Transmission Protection Instrument (TPI), a scheme created to buy government bonds from countries suffering a market attack.

"In the current uncertain environment, market confidence can be challenged by exogenous factors other than the management of public budgets," Giorgetti said.

(editing by Alvise Armellini)