By Giuseppe Fonte and Gavin Jones
ROME (Reuters) -Italy's government on Monday approved a budget for next year with measures worth around 24 billion euros ($25.3 billion) in tax cuts and increased spending, despite market concerns over the country's strained public finances.
Under the scheme, Italy will drive up next year's budget deficit to 4.3% of gross domestic product from 3.6% under current trends, due to 15.7 billion euros ($16.5 billion) of extra borrowing mainly devoted to funding tax cuts.
An additional 8 billion euros will go to finance a raft of other spending including pensions, the health service and public sector contracts, to be largely funded by savings elsewhere in the budget and higher excise duties on tobacco products.
"It is a budget that I consider very serious, very realistic," Prime Minister Giorgia Meloni said during a press conference.
Economy Minister Giancarlo Giorgetti said he was confident it would be well received by markets and European Union authorities.
Investors have been demanding a higher premium to hold Italian government bonds since Rome last month raised its budget deficit targets for the 2023-2025 period, setting it up for a possible clash with the European Commission.
The gap between yields on Italian 10-year bonds and the German equivalent was stable after the budget's approval, hovering slightly above 2 percentage points (200 basis points).
The challenging market environment may continue over coming weeks, when the budget faces scrutiny from credit ratings agencies, with S&P Global, DBRS, Fitch and Moody's (NYSE:MCO) all reviewing the euro zone's third largest economy.
Giorgetti said Italy's fiscal stance was justified by the need to support activity in the face of international headwinds stemming from the conflicts in Ukraine and, more recently, the Middle East.
The budget will extend to 2024 existing temporary cuts to social contributions, in an effort to help middle and low-income workers cope with high consumer prices.
The total fiscal package is worth 28 billion euros including a separate decree, approved along with the budget, that sets the rate of income tax (IRPEF) at 23% for people earning up to 28,000 euros per year.
This temporarily replaces the current regime in which four IRPEF rates run from 23% on income up to 15,000 euros, to a top rate of 43% on income above 50,000 euros.
AGEING POPULATION
The budget also earmarks around 1 billion euros for several measures aimed at addressing Italy's demographic crisis. One of these removes social contributions paid by working mothers with at least two children.
At the same time, however, Meloni said the government was withdrawing next year a cut in sales tax on baby products which is currently in place.
Births last year saw a 14th consecutive annual drop and were the lowest since the country's unification in 1861.
The rapidly ageing population means additional budget resources will go on pensions.
Giorgetti said that due to difficult budget and economic conditions a temporary regime allowing people to retire if the sum of their age and their years of work totals 103, would be toughened slightly next year.
The government had hiked the age requirement but the sum of the age and years of contributions paid was "not 104 in full," Giorgetti said, without providing further details.
Italy's state pension bill, already among the highest in the world, is seen reaching 17% of GDP in 2042, from 15.3% in 2022.
The government also said on Monday it will implement from next year a 2021 international agreement to introduce a minimum global corporate tax rate of at least 15%, to be applied to multinational groups with annual revenues of more than 750 million euros.
This could increase tax revenues in Italy by between 2 and 3 billion euros, a government official said.
In addition, from next year companies that locate production in Italy from abroad will have their income tax halved for five years, the Treasury said.
($1 = 0.9492 euros)