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By Francesco Guarascio
BRUSSELS (Reuters) - EU leaders agreed on Thursday to focus government spending on investment that supports growth - a decision Italy interpreted as a green light to boost public investment spending even if it leads to a higher deficit.
Despite a recession, Italy reduced its budget deficit below the European Union ceiling of 3 percent of GDP last year, European Commission estimates show. That shortfall is set to fall to 2.1 percent in 2013, unless Rome changes policies.
More importantly, if Italy stays the current course, it will reach a budget balance this year in structural terms - which discounts the economic cycle and is the EU benchmark for public finances - against a 1.4 percent deficit last year.
But to pull its economy out of recession, officials say, Italy may need to ease its deficit reduction ambitions, even though euro zone countries are legally obliged to keep reducing structural deficits until they reach a balance.
Outgoing Italian Prime Minister Mario Monti said the wording agreed at the summit allowed for more flexibility on deficits and would permit Italy to invest in jobs and social services without breaching EU rules.
"We believe Italy should use any possible extra margin allowed... to implement an urgent plan to support the creation of stable and better jobs, including by reducing non-wage taxes on new permanent contracts, encouraging apprenticeships and strengthening child-care services," Monti said during a press conference at the end of a EU Summit in Brussels.
The statement from EU leaders called for governments to balance the need for budget cuts with the necessity of spurring growth and combating unemployment.
The balance should be achieved "through a mix of expenditure and revenue measures", including "short-term targeted measures to boost growth and support job-creation, particularly for the young, and prioritising growth-friendly investment".
Total investment in Italy has been falling dramatically - in 2012 it tumbled 8.8 percent from 2011 and this year it is too expected to fall a further 3 percent.
Italy's public investment was equal to 1.8 percent of GDP last year and is to ease to 1.6 percent of GDP this year. The economy is expected to contract 1 percent in 2013.
"The conclusions of this summit tell us that we can deviate from the target of the balanced budget in structural terms to make productive investments," Italy's minister in charge of European affairs, Enzo Moavero, told reporters.
Moavero said that Italy may propose a set of investments already in the stability plan to be delivered to the EU Commission by the end of April. If accepted, this could allow Italy to deviate from the structural balance before summer.
EU Economic and Monetary Affairs Commissioner Olli Rehn said on Thursday the Commission would publish in the next few weeks a report on how public investment should be treated in relation to the structural balance target.
Rehn said that one of the criteria for allowing a country to deviate from the target of a structurally balanced budget via investment was for the country's deficit to be below 3 percent of GDP - a condition Italy meets.
The other, Rehn said, was for the country's debt to be declining. According to the Commission's forecasts however, Italy's debt will increase this year to 128.1 percent of GDP from 127.1 percent in 2012.
(Writing By Jan Strupczewski)