Italy's 2015 budget plans risk drawing EU fire

The cabinet was set to meet around 1600 GMT to unveil the budget with just hours to go before a EU deadline, after which it will be scrutinised by the European Commission before going before the lower and upper houses of parliament.

Italy's new prime minister Matteo Renzi is walking a tightrope between defending neighbouring powerhouse France - which is defying Brussels over cutting its deficit - and keeping in the good graces of the Commission as Italy also fails to meet its fiscal targets.

Italy discovered earlier on Wednesday that it had escaped its third recession in six years after new EU data collation methods - which include illegal activities such as prostitution and drugs - revised up its GDP figure for the first quarter.

But a slump in the second quarter looked set to continue in the third, which would inevitably plunge the eurozone's third-largest economy back into the mire.

The budget forecasts the public deficit will come in at 2.9 percent in 2015 - under the 3.0 percent EU ceiling and a marginal reduction of 0.1 percent on the 2014 figure, but considerably less than the 0.5 percent reduction requested by the Commission.

The government has also delayed balancing its budget in structural terms from 2015 to 2017, and has forecast a debt to GDP ratio of 133.4 percent in 2015 - more than twice the EU ceiling of 60 percent.

While France may be the biggest budget offender, Italy has been leading the fight against austerity policies in Europe and observers will be watching closely to see how far Rome will go.

But playing ball on the 3.0 percent ceiling rule is less about kowtowing to Brussels than placating the markets and avoiding paying more to finance its vast public debt, which stood at 2.14 trillion euros in August according to the Bank of Italy.

European Commission economic policy spokesman Simon O'Connor has tried to stamp down fears that Italy will be chastised over the budget, tweeting in Italian that "while some media see 'warnings' in every word spoken in Brussels, we are waiting to see the budget before commenting."

'Biggest tax reduction ever'

Renzi has presented a let up in austerity as an effort to boost growth.

"Everybody, apart from certain people in Europe, understand that the important thing is growth," Renzi said in a meeting late on Tuesday with his Chinese counterpart Li Keqiang, in a fresh jab at austerity hawks.

Renzi has boasted the plans constitute "the biggest tax reduction ever attempted" in Italy, with 18 billion euros less in taxes than in the 2014 budget.

Measures expected include €6.5 billion euros to reduce an unpopular regional labour tax (IRAP) as well as €10 billion to extend an income-tax cut for low earners.

€1.0 billion euros have been earmarked for tax breaks for companies hiring new staff on full-time contracts and another €500 million are destined for families.

The sticking point with the Commission may be the government's plan to borrow €11.5 billion to finance the tax cuts.

To Renzi's relief, the business sector has already hailed the budget, with the head of the Confidustria lobby Giorgio Squinzi expressing his "full satisfaction" and saying "the direction taken is one we hoped for for years."

And his government received a welcome boost from ratings agency Moody's on Tuesday, which praised its "accelerated reform efforts", saying they would "mitigate the impact of the economy's return to recession on Italy's creditworthiness."

But not everyone is happy, with the leader of Italy's biggest trade union CGIL, Susanna Camusso, warning the "mix of spending cuts and tax reductions for some will keep the country in a state of recession."