Italy PM Renzi says tax cuts necessary as growth stutters

September 1, 2016 9:02 AM EDT

Italian Prime Minister Matteo Renzi speaks next Italian German Chancellor Angela Merkel (not seen) and French President Francois Hollande (not seen) during a news conference on the Italian aircraft carrier Garibaldi off the coast of Ventotene island, cent

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By Steve Scherer

ROME (Reuters) - Italian Prime Minister Matteo Renzi on Thursday said he would cut taxes next year because it is the only way to ensure faster growth, appearing to shrug off any likely opposition from European Union budget hawks.

The European Commission allowed the country extra deficit spending this year, in part to manage mass migrant arrivals, but warned that Italy has already received an "unprecedented amount of flexibility".

"I know only one rule: lower taxes," Renzi said in a radio interview, adding that "well-managed infrastructure investments" were also necessary.

Renzi announced that previous cuts to property taxes and in favor of low earners would remain, and announced for the first time single-owner businesses and professionals will pay a 24-percent tax rate next year, replacing the current, more complex system.

He also said on Thursday he wanted to lower the state television fee, and the government is said to be discussing whether to cut payroll or income taxes next year.

Italy must present its 2017 budget plan by Oct. 20, and the government has already warned it may overshoot its deficit target this year, set at 2.3 percent of output, because growth has been lower than expected.

Gross domestic product unexpectedly ground to a halt in the second quarter, though Renzi said he expected the final figure to be revised slightly higher when it is published on Friday.

Renzi met German Chancellor Angela Merkel on Wednesday at a bilateral summit in Italy. Though Merkel did not mention Italy's tax-cut plans, she did give the Italian premier reason to be optimistic about winning budget leeway for post-disaster expenditure.

"Italy will present a transparent plan and we will find a reasonable solution in Europe," she said.

To spearhead reconstruction efforts, the government named Vasco Errani, a former regional governor, an extraordinary commissioner on Thursday.

Germany is the euro zone's biggest economy and has been the main proponent of budget austerity in the wake of the European debt crisis that forced several countries to seek international bailouts.

Even if Renzi wins political backing to use deficit spending to spur growth, Italy will have to walk a fine line because of its debt, worth 1.3 times annual GDP and one the world's largest.

(Editing by Jeremy Gaunt)

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