ROME (Reuters) - Italy's recession this year will be far steeper than previously expected, Mario Monti's government said on Thursday, sharply hiking its budget deficit and debt forecasts despite the painful austerity measures adopted.
The government forecast that gross domestic product would shrink this year by 2.4 percent, twice as much as the previous projection of a 1.2 percent drop, made in April.
The weakening economy is badly hurting fiscal consolidation efforts. The government hiked its forecast for the 2012 budget deficit to 2.6 percent from 1.7 percent, and more than tripled the 2013 target to 1.8 percent from 0.5 percent.
Until April, the government was pledging to balance the budget in 2013, a goal Monti inherited from his predecessor Silvio Berlusconi.
The hikes in the deficit goals are higher than were widely expected, even though recent Bank of Italy data showed the fiscal gap in the first 7 months was fractionally higher than the same period of 2011, when the full year deficit came in at 3.9 percent.
The economy is now forecast to contract by 0.2 percent next year, compared with growth of 0.5 percent seen previously, according to the Treasury's update to its Economic and Financial Document (DEF), which was approved by the cabinet after a three-hour meeting.
Economy Minister Vittorio Grilli said that despite the worsening picture for the economy and public finances, Italy had no intention of seeking help from the European Union bailout fund or the European Central Bank.
"Our public finances are absolutely in order," he told reporters.
AUSTERITY
Monti replaced Berlusconi last November as Italy's bond yields were soaring, and rushed through more than 20 billion euros of austerity measures to head off a debt crisis.
However the measures have sapped consumer morale and deepened the recession in the euro zone's third largest economy, eating into tax revenues and pushing up the deficit as a proportion of output.
Monti, speaking at the same news conference, defended his policies, indirectly citing the recent decision by the ECB to potentially buy unlimited amounts of government bonds to help bring down the borrowing costs of countries in difficulty.
"If Italy did not continue the resolute road it has taken, the markets would not just give negative signals but Italy would find it more difficult to continue to exercise the influence that it has recently exercised on the European political and economic scene," he said.
The DEF update also showed a worsening of the profile for Italy's massive public debt, the second highest in the euro zone after Greece's as a proportion of output.
The 2012 debt-to-GDP forecast was raised to 126.4 percent from 123.4 percent previously, hitting its highest level on record. The 2013 forecast was hiked to 126.1 percent from 121.5 percent.
The government also hiked its forecasts for the "structural" budget this year and next, which calculates the fiscal gap net of the effects of the recession.
However, it stressed that it would still meet its commitment to the European Union of a structural balanced budget in 2013.
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