The Italian government will meet on Wednesday to set the framework for next year's budget against a backdrop of slowing growth and a rising fiscal deficit in the euro zone's third-largest economy, officials said.
Prime Minister Giorgia Meloni faces a tough task to deliver promised tax cuts in the budget, to be presented next month, without upsetting financial markets that are keeping a keen eye on Rome's creaking public finances.
The closely watched yield gap between Italian and German 10-year bonds - a gauge of market sentiment towards highly indebted Italy - rose on Wednesday to 1.94% (194 basis points), its highest since May 5.
The cabinet is expected to meet at 1630 GMT to sign off on the Treasury's new forecasts which, three sources said, will reflect growing economic difficulties after a slew of weak data.
This year's growth forecast will be trimmed to around 0.8% from a 1.0% projection made in April, while in 2024 gross domestic product is seen rising 1.0% under an unchanged policy scenario, down from a previous 1.5%, they said.
However, the final growth target for next year will be 1.2% or 1.3%, the sources, who asked not to be named said, thanks to tax cuts for low and middle-income earners and other expansionary measures Meloni plans to include in the budget bill.
This year's fiscal deficit target is now expected to be in the region of 5.5% of GDP, up from a previous 4.5%, while in 2024 it is seen at between 4.1% and 4.3%, up from 3.7%.
Meloni's room for manoeuvre has been reduced by costly green building incentives, which were introduced before she took office last year but are still weighing on public accounts.
These incentives, in the form of tax credits, helped boost a strong growth rebound in 2021 and 2022 after the COVID-19 pandemic, but they have proved a heavy burden for state coffers, costing some 54 billion euros ($57.07 billion), or 2.8% of GDP, last year alone.
Despite these problems, next year's deficit is still seen below 4% of GDP under current trends, allowing Meloni leeway of several billion euros to fund budget measures while keeping the deficit inside the new target.
($1 = 0.9463 euros)
