By Giuseppe Fonte
ROME (Reuters) - Italy needs to find 20 billion euros ($21.53 billion) to fund budget pledges for next year, new government projections show, underscoring the narrow fiscal path ahead for Prime Minister Giorgia Meloni's government.
Unveiling the Treasury's twice-yearly Economic and Financial Document on Wednesday, Italy reaffirmed its commitment to gradually reduce the annual budget deficit in line with European Union parameters, despite a clouding economic outlook.
For 2025, the Treasury forecast a deficit-to-GDP ratio of 3.7%, which it predicted could rise to 4.6% if Meloni extends a raft of spending and tax-cutting measures that the government has already struggled to fund in its 2024 budget.
The difference between the two projections, 0.9 points of GDP, is equivalent to just over 20 billion euros assuming the Treasury's estimate of gross domestic product for next year.
A further 23 billion euros annually would be needed if the measures were to be kept in place in 2026 and 2027.
The package includes cuts to social contributions and income taxes for low- and middle-income workers amounting to around 15 billion euros.
Alternatively, the government could finance the measures through a combination of spending cuts and tax increases, leaving the deficit broadly unchanged.
Italy has promised a prudent approach to state finances in accordance with the latest reform of the bloc's fiscal rules, that mandate a steady reduction of deficit and debt from 2025 over a span of four to seven years.
Economy Minister Giancarlo Giorgetti said Italy would negotiate with the EU Commission to extend its fiscal adjustment path to seven years.
Italy's public debt, the second largest in the euro zone as a proportion of output and under close scrutiny by rating agencies and markets, is forecast to rise to 139.8% of GDP in 2026 from 137.3% in 2023 before declining marginally to 139.6% the following year, according to the latest projections.
Giorgetti attributed this trend to the "devastating impact" of costly home renovation incentives, which would continue to weigh on the public finances despite recent government restrictions, due to people detracting completed building work from their tax bills.
However, Wednesday's projections show Italy's debt ratio starting to fall "rapidly" from 2028 as the effects of the incentives fade.
($1 = 0.9289 euros)