Italy's Prime Minister Matteo Renzi said Monday the government would bite the bullet and pay out over 2.0 billion euros to pensioners following a court order, despite the blow to the debt-laden country's budget.
The new decree will see an average of around 500 euros paid back to some four million retirees for a total bill of 2.18 billion euros ($2.47 billion), Renzi said, to be funded with money originally set aside for measures to ease poverty.
At the start of May, Italy's constitutional court overturned a key plank of the country's pension reforms, leaving the government facing a mammoth adjustment estimated by the premier to total 18 billion euros.
During the financial crisis at the end of 2011, the technocrat government in power at the time had pushed through draconian austerity measures, including a halt in inflation-linked increases for pensions above 1,400 euros a month.
The government will begin with payouts for pensions of under 3,000 euros a month, because tackling the entire sum at once would mean cuts to essential sectors like education and welfare, Renzi said.
"Making all the back-payments would have involved for 2015 resources which would have taken the debt to GDP ratio to 3.6 percent," Finance Minister Pier Carlo Padoan said in a press conference.
"This would have lead to an infringement procedure from the European Union for excessive deficit," he said.
Italy, which only this month emerged from the deepest recession since World War II, had pledged to lower its budget deficit from 3.0 percent to 2.6 percent of GDP in 2015 -- a promise it will now be harder for Renzi to keep.
The bad news was tempered somewhat by the decision by the International Monetary Fund (IMF) to revise up Italy's 2015 growth forecast.
The IMF said the eurozone's third largest economy was now tipped to grow 0.7 percent this year, raising its initial forecast by 0.2 percent and bringing it into line with the government's official forecast.
The organisation also raised its 2016 forecast from 1.1 percent to 1.2 percent.
However, it said more needed to be done to tackle the country's towering unemployment and debt.
"Italy's economy is emerging slowly from a painful recession," it said in a report, following the news this month that the country had finally rebooted its economy after nine months of recession and zero growth in the last quarter of 2014.
"Supported by stronger exports and higher spending by firms and consumers, growth is projected at 0.7 percent this year and 1.2 percent next year," the IMF said.
"But much higher growth is needed to bring down unemployment and debt at a faster pace," it added.
Italy's unemployment rate rose to 13 percent in March, with youth joblessness up to 43.1 percent -- compared to a 22.7 percent rate in the eurozone.