(Bloomberg) -- Italian Premier Giorgia Meloni’s deficit-laden budget is entering its final phase with the unveiling of tax cuts, measures for families, and also how to pay for them.

Giveaways to voters will take the political spotlight in Monday’s announcement in Rome, while clues on revenue-raising plans — such as asset sales hinted at by Finance Minister Giancarlo Giorgetti — are likely to draw the attention of investors. 

Shrinking stakes in companies ranging from lender Monte dei Paschi di Siena SpA to railway Ferrovie dello Stato SpA may feature in those proposals after the government earmarked €20 billion euros ($21 billion) to come from privatizations over the next three years.

Meloni’s government needs more money after its looser deficit forecasts revealed at the end of last month showed the shortfall won’t drop below the European Union’s 3% of economic output limit until 2026 — a year later than previously planned.

That’s partly due to slower-than-expected growth and a change in accounting treatment of housing renovation incentives known as the “superbonus,” which has since been eliminated but continues to hurt public finances. 

But costly campaign promises that Meloni can’t disregard are also part of the problem as she prepares for European elections next year that will be a test of support and could spark competition within her fractious governing coalition.

The budget law due to be unveiled will contain further details on planned tax cuts on wages and a reduction of tax brackets. 

It will also include a renewal of contracts for state employees, particularly health care workers, and measures for aimed at encouraging parenthood to combat Italy’s historically low birth rates, according to people familiar with the discussions. 

A press conference is expected after a cabinet meeting on Monday.

What Bloomberg Economics Says...

“The end of tax incentives introduced during the pandemic is causing fiscal policy to weigh on GDP growth. Higher borrowing costs will test the country’s fiscal resilience. Even though Meloni has tried to prevent government spending from being significantly increased, the ECB’s rate hikes have already caused Italian yields to jump.”

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Meloni’s difficulties highlight her conundrum balancing election promises with the need to keep Italy’s public accounts in order in a country plagued by weak economic growth.

Gross domestic product will probably only expand 0.7% this year, and rebound just 0.8% in 2024 and 1% in 2025, according to central bank projections published Friday. 

That news followed several alarm bells sounding on Italy’s state finances. Senior Bank of Italy official Sergio Nicoletti Altimari told lawmakers last week that Meloni’s budget plan is “plausible, though slightly optimistic” and suggested that the government exercise “extreme” prudence.  

Fitch Ratings noted that Italy’s latest budget plans “represent a significant loosening of fiscal policy relative to previous targets.” Meanwhile the International Monetary Fund projected that the country’s debt burden will still be stuck above 140% of GDP even in five years’ time.

Italy’s 10-year yield premium over Germany — a measure of confidence in the country’s debt sustainability — breached 200 basis points twice this month. 

Such moves will keep European Central Bank officials on alert, Governing Council member Gabriel Makhlouf told Bloomberg last week.

Italy isn’t the only euro-area nation struggling to meet EU fiscal rules: France will have a deficit of 4.7% this year and Spain of 4.1%, forecasts compiled by Bloomberg showed. But its huge debt load attracts investor focus.

Bank of Italy Governor Ignazio Visco — also an ECB policymaker — told Bloomberg Television’s Francine Lacqua on Friday that there’s no cause for excessive concern, and that “there are no signs” that spreads are at a point that would require intervention.

For him, the main issue is expansion — and proving to markets that the economy has the potential to grow out of its problems.

--With assistance from Flavia Rotondi.

©2023 Bloomberg L.P.