Italy to stick with commitment to cut deficit below EU's 3% ceiling in 2026

By Giuseppe Fonte

ROME (Reuters) - Italy plans to confirm a commitment to bring its deficit-to-GDP ratio below the European Union's 3% ceiling in 2026 in the Treasury's medium-term structural budget plan to be presented by the middle of September, sources close to the matter told Reuters.

Rome was put under a so-called Excessive Deficit Procedure by the EU this year and its new budget framework, which is aimed at cutting the fiscal gap in line with EU prescriptions, must also comply with the latest reform of the bloc's fiscal rules.

The infringement procedure obliges Italy to cut its structural budget deficit -- net of one-off factors and business cycle fluctuations -- by 0.5% or 0.6% of GDP per year.

The new fiscal rules require a slow but steady pace of deficit and debt reduction from 2025 over four to seven years.

Asking not to be named due to the sensitivity of the matter, the sources said the Treasury saw Italy's deficit broadly in line with the budget estimates outlined between April and May.

At the time, the government promised to cut the fiscal gap to 3.6% of GDP in 2025 from 4.3% expected this year, and to 2.9% in 2026, despite levels slightly higher under current trends.

Italy's 2023 deficit came in at 7.4% of GDP, the highest in the euro zone, pushed up by generous incentives for energy saving home improvements, the so-called Superbonus.

The structural budget plan, which provides the framework for the 2025 budget, needs to be submitted to European Union authorities by Sept. 20.

Even as it pledged to rein in the deficit, Prime Minister Giorgia Meloni's government repeatedly said it aimed to extend to 2025 temporary cuts to social contributions and tax cuts for people earning up to 28,000 euros ($31,125) per year.

Both measures are currently in place until December and extending them to next year has a cost for state coffers of about 15 billion euros.

In addition, separate sources said the government was working on a further package of tax cuts aimed at helping people earning up to 60,000 euros.

None of the sources clarified how the government plans to finance the measures.

Meloni will meet with key members of her coalition on Friday to discuss Rome's budget plans. ($1 = 0.9001 euros)

(Reporting by Giuseppe Fonte, editing by Gavin Jones and Keith Weir)