By Gavin Jones
ROME (Reuters) - Italy's latest economic forecasts reveal how little progress has been made to fix its finances and restore growth since Silvio Berlusconi was forced from office at the height of the euro zone debt crisis in November 2011.
With bond yields soaring, Berlusconi bowed to a demand by the European Central Bank that Italy balance its budget in 2013 rather than 2014 as planned, to try to convince markets it could curb a huge public debt then equal to 120 percent of output.
The Economic and Financial Document (DEF) approved by the cabinet on Friday promised to balance the budget in 2017, a full four years later, and forecast the debt at a record high of 133 percent of output both this year and next.
When former European Commissioner Mario Monti replaced the discredited Berlusconi and quickly pushed through a tough reform of the pension system, hopes were high it was the start of a sustained drive to cut debt and improve a dismal growth record.
Almost two years on, those hopes have all but disappeared.
When Berlusconi resigned, Italy was forecasting the debt to fall to 116 percent of output this year. A level of 140 percent in the euro zone's third largest economy would have been unthinkable. Not anymore.
"Under a scenario of slow growth and no privatizations, which is what we have got used to, of course the debt could hit 140 percent," said Mizuho chief economist Riccardo Barbieri.
"By 2020 we could be at 150 percent and we could get there even quicker," he added.
Monti's efforts to deregulate services and labor laws were squashed by the parties that propped up his government before Italians gave him a resounding thumbs down at an election in February this year which produced no clear winner.
The resulting left-right coalition government led by Enrico Letta has bickered from the moment it took office and prospects for both growth and the debt have continued to worsen.
The DEF sees the economy shrinking 1.7 percent this year, down from a 1.3 percent contraction forecast in April, and it cut 2014 growth to 1.0 percent from 1.3 percent. Most analysts see growth of 0.7 percent at best next year.
Yet more important than the numbers is the fact that Italy's political situation has made no more progress than its economy, dimming prospects for the reforms needed to turn things around.
According to Lucrezia Reichlin, a former head of research at the European Central Bank, Italy's medium term growth potential is now close to zero due to its failure to reduce costs and bureaucracy, tackle corruption or reform the justice system.
"Since the days of the deepest crisis (in 2011) Italy has done nothing to improve its competitiveness," she said in a column in Corriere della Sera daily. As a result its prospects for sustained debt reduction are "non-existent".
Letta cuts a far more sober and reassuring figure than Berlusconi, but his ruling coalition is just as unruly and is deeply divided on economic policy.
Speculation has risen that there will be a new election in spring and on Sunday Economy Minister Fabrizio Saccomanni threatened to resign as the government squabbled over whether to suspend a hike in sales tax due to take effect in October.
"I'm not going to make a desperate search for a billion euros if in February there's going to be a vote," he said. "It's all useless if the election campaign has already started."
The parties have done nothing to reform the dysfunctional electoral law which led to February's hung parliament, meaning that a new vote in the spring may well produce an equally inconclusive outcome.
While the euro zone's debt crisis seems to have calmed for now, Italy, with the region's most chronically sluggish economy and second largest debt, remains vulnerable to future tensions.
"Markets will start to worry about Italy's rising debt when the next recession comes," said Deutsche Bank economist Marco Stringa. "Then they will see if it has done the reforms needed to improve its growth potential and if we are still where we are now it will be in a very difficult position."
(Editing by Robin Pomeroy)