Italy’s caretaker government yesterday sharply hiked its targets for public debt this year and next despite waves of austerity measures, and said there was room for less restrictive fiscal policy.

An economic planning document published by Mario Monti’s outgoing technocrat Cabinet forecast that the debt, which hit an all-time high of 127 per cent of output last year, would rise further to 130.4 per cent in 2013.

That was an upward revision from 126.1 per cent targeted previously. The Government hiked the 2014 debt target even more sharply, to 129 per cent of GDP from 123.1 per cent.

Italy, the eurozone’s third largest economy, has the bloc’s second-largest debt after Greece in terms of percentage of GDP. When Monti took office the debt stood at 120.8 per cent of GDP.

Monti, who replaced Silvio Berlusconi as Prime Minister as Italian borrowing costs surged at the end of 2011, has had to repeatedly hike his targets for the fiscal deficit and debt, as a steep recession has taken a toll on public finances.

The economy contracted by 2.4 per cent last year and last month the Government forecast it would shrink by 1.3 per cent this year, a projection considered optimistic by many economists.

Gross domestic product fell for six consecutive quarters to the end of 2012 and recent data suggests no recovery is in sight, though Economy Minister Vittorio Grilli told reporters he still expected a pick-up later this year.