* Sees GDP growth 1.2 pct this year, slightly lower in 2019
* Aims to avoid pro-cyclical belt-tightening budget
* Will overhaul tax system, cut spending, privatise
* May scrap income tax cut passed by previous government (Adds quotes, details, background, budget meeting)
MILAN/ROME, Aug 8 (Reuters) - Italy's economy minister said on Wednesday lower economic growth was expected to increase the deficit next year and slow the reduction of the public debt, but he reiterated his commitment to a prudent fiscal policy.
Giovanni Tria, in a newspaper interview, also said that Italy planned to sell its holding in the state-controlled bank Monte dei Paschi di Siena - remarks that appeared to show a split within the ruling coalition composed of the 5-Star Movement and far-right League.
Tria said the government estimated the country would grow by 1.2 percent this year, lower than the 1.5 percent previously forecast. He also expected a downward revision of economic output to 1 or 1.1 percent next year from a previous estimate of 1.4 percent.
"This slowdown would bring the deficit to 1.2 percent in 2019," he told the newspaper Il Sole 24 Ore. That would be higher than a deficit target of 0.8 percent of gross domestic product drawn up by the previous administration.
Tria added that a clearer estimate of the deficit would be available in September and would depend on the cost of servicing the debt and on the amount of revenues or expenditure cuts that the government uses to avoid a scheduled hike in sales taxes.
The worsening economic forecasts could put the new anti-establishment government on a collision course with the European Commission, which monitors the budgets of EU countries.
"We are discussing with the Commission so as to avoid a pro-cyclical fiscal correction which would intensify the slowdown in the economy," he said.
But Tria, an academic who is seen as more moderate than many of his government partners, said all the reform measures included in the executive's plans were "compatible" with commitments Italy had with the EU over its public finances.
He said lower growth could slow the reduction of Italy's debt, the second highest in the EU after bailed-out Greece, but the government maintained the target of bringing it down.
This could be achieved partly by a plan to privatise public companies, he said.
Tria and other top ministers were due to discuss the budget on Wednesday, following a preliminary meeting last week. He said this had been largely devoted to finding ways of boosting growth by increasing public investments.
Tria said planned higher welfare spending and income tax cuts would be introduced gradually, and financed by cutting other areas of public spending and eliminating billions of euros of tax breaks currently available to companies and individuals.
"The whole tax system needs to be re-arranged, with the guarantee that no-one will lose out in the change from the old to the new systems," he said.
The so-called "citizens wage", ensuring income of up to 780 euros per month for the poor, will eventually take the place of various other forms of income support now available, he said.
At the same time, he indicated an 80 euro-per-month income tax cut for low earners introduced by the previous government will also be scrapped, saying its application had created "infinite complications" for the tax system.
Italy owns 68 percent of Monte Paschi after it bailed the bank out in 2016 under a 5-year rescue plan agreed with the European Commission which included a commitment to sell the government's "entire stake" in the bank by a date that is confidential.
Tria's comments on the bank appeared to be at odds with statements made previously by senior coalition members.
League's economic spokesman Claudio Borghi had said the bank would remain in public hands and would be used to provide funding to local communities.
writing by Giulia Segreti, Francesco Guarascio and Gavin Jones, editing by Raissa Kasolowsky, Larry King, Richard Balmforth