ROME:

The Italian Senate on Saturday passed the government’s deficit-cutting 2025 budget, giving parliament’s final approval to the package which becomes law just ahead of an end-year deadline.

Prime Minister Giorgia Meloni’s third budget aims to lower next year’s fiscal deficit to 3.3% of gross domestic product (GDP) from a targeted 3.8% in 2024, while cutting taxes for low and medium-income brackets.

Italy is under European Union orders to slash its deficit after huge overshoots in 2022 and 2023, and has pledged to bring it below the EU’s 3% of GDP ceiling in 2026.

However, the public debt, which is proportionally the second highest in the euro zone, is projected to rise through 2026 due to the delayed effect of costly state subsidies for energy-saving building work – the so-called “super-bonus”.

The Treasury forecasts the debt to climb from 134.8% of GDP last year to 137.8% in 2026, before marginally declining.

The rightwing government won the final vote on the budget after a second reading in the upper house Senate by 108 to 63. It was approved by the Chamber of Deputies last week.

The package widens next year’s deficit to 3.3% of GDP from an estimated 2.9% based on current trends, borrowing an extra 9 billion euros ($9.4 billion) to fund tax cuts and some additional expansionary measures.

The euro zone’s third largest economy has stagnated in recent months, and growth this year is now seen coming in at around half of the government’s official 1% target.

The slowdown may have been even sharper if not for the regular arrival in Rome’s coffers of tens of billions of euros from the European Commission under the EU’s post-Covid-19 Recovery Fund.

Rome’s fiscal consolidation efforts may be helped, however, by a decline in borrowing costs.

The parliamentary budget watchdog forecast this month that yields on Italian sovereign bonds will be significantly lower than projected by the government, with savings of 1.7 billion euros next year and 17.1 billion by 2029.