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Increasing spending would be big step back for Italy - EU's Moscovici

Warns against returning to 3% deficit

Italy would be moving backwards if it returned to a budget deficit of 3 per cent of national output, the European Commissioner for Economic and Financial Affairs was quoted on Thursday as saying, after Rome said it wanted to boost spending.

Party leaders in the Italian coalition government on Monday signalled they would seek leeway from the EU to increase next year's budget deficit, heading onto a collision course with the European Commission and investors who want it cut.

"Obviously, returning to 3 per cent would be a big step back," Commissioner Pierre Moscovici told El Pais newspaper in an interview. "It is in (Italy's) interest to reduce its public debt," he added.

Italy's coalition government is due to deliver Rome's latest economic growth and public finance targets at the end of the month, before the full budget. Credit rating agency Fitch lowered the outlook on its debt rating on Friday.

Under EU rules, no country should have a budget deficit greater than 3 per cent of GDP product or debt above 60 per cent of GDP. Italy's debt amounts to more than 130 per cent, the second highest in Europe after Greece, making it vulnerable to market pressure.

Moscovici, in Spain to meet Prime Minister Pedro Sanchez, played down any idea of southern European contagion from Italy's debt woes, drawing a contrast between the governments of Spain and Italy.

"(Spain) may be having trouble drawing up a budget, but it has a pro-European government that sticks to the rules and is reducing its deficit," he said.

Spain is due to deliver a draft for its 2019 budget to Brussels in mid-October, he said, and he urged Spanish political parties to come together to approve a budget for next year.

"I hope the Spanish political forces understand that it's in the national interest to have a budget," Moscovici said.

Sanchez, who leads a fragile minority government, faced his first crisis in July when political allies pulled support for his government's budget.

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