Italy to approve 2027 budget on Wednesday as talks progress with EU on deficit

ROME, Oct 27 (Reuters) - Italy plans to approve its budget law for 2027 on Wednesday, Economy Minister Giancarlo Giorgetti said, as talks with European Union authorities progress over granting a temporary increase in the fiscal deficit.

Speaking at a conference on Italy's regions on Tuesday, Giorgetti said he faced spending requests from ministries that were "far above" Italy's budgetary capacity, reiterating Rome's cautious stance on state finances amid rising borrowing costs.

"These are very intense times, we're working day and night," Giorgetti said.

The cabinet is expected to ⁠meet on Wednesday at 1100 GMT.

Italy aims to fund tax cuts and spending hikes worth around €23.5 billion ($26.22 billion) next year, in what will be the last budget under Prime Minister Giorgia Meloni before national elections due in 2027.

Around half of the funding needs stem from the European Union's so-called "National Escape Clause" (NEC) which grants temporary and partial exemption from the bloc's budget rules.

The NEC currently allows higher deficits to boost the defence budget and to pay for investments to make the economy greener. Italy, however, wants to use part of the leeway to help families cope with surging energy costs.

"We have made progress with the ⁠European Commission, so I believe we will finalize by tonight the proposals we believe can be considered admissible," Giorgetti said.

Italy has estimated its budget deficit will rise to 3.4% of gross domestic product next year from 2.9% expected in 2026, before marginally declining to 3.2% in 2028.

Banks, insurers and other financial institutions such as the state ⁠lender Cassa Depositi e Prestiti (CDP) are expected to contribute to the budget through higher taxes worth around €5 billion.

Options being discussed include higher IRES corporate tax on the financial sector and an increase in a tax on financial transactions, people ⁠familiar with the matter said.

Italian banks complain they are already subject to a 27.5% rate of IRES while other businesses pay a lower 24%, and they say other sectors should help ease the burden ⁠of energy costs for households and firms.

Italy may also increase the IRAP corporate tax on companies that produce, distribute, and supply energy products.

Meloni, who is facing mounting pressure from protests over the rising cost of living, wants to announce tax cuts mainly benefiting middle-earners.