The Italian parliament gives final approval to the 2025 budget

Italy’s Senate approved the government’s 2025 deficit-reduction budget on Saturday, giving parliament final approval for the package to become law just before a year-end deadline.

Prime Minister Giorgia Meloni’s third budget aims to reduce next year’s budget deficit to 3.3% of gross domestic product (GDP) from a target of 3.8% in 2024, while cutting taxes on low and middle income earners.

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

However, public debt, which is proportionally the second highest in the euro area, is forecast to rise until 2026 due to the lagged effect of costly government subsidies for energy-saving building work – the so-called ‘super-bonus’.

The Treasury predicts debt will rise from 134.8% of GDP last year to 137.8% in 2026, before falling marginally.

The right-wing government won the final vote on the budget after a second reading in the Upper House Senate by 108 votes to 63. It was approved by the House of Representatives last week.

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

The eurozone’s third-largest economy has stagnated in recent months and growth this year now looks set to come in at about half the government’s official target of 1%.

The slowdown might 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.

However, Rome’s fiscal consolidation efforts can be helped by lowering borrowing costs.

The parliamentary budget watchdog predicted this month that yields on Italian government bonds would be significantly lower than the government had forecast, with savings of 1.7 billion euros. euros next year and 17.1 billion until 2029.