By Giselda Vagnoni

ROME (Reuters) – Italy's Prime Minister Giorgia Meloni stated on Sunday that she will lead the government responsibly until the end of its mandate, as parliament debates a budget aimed at supporting the euro zone's third-largest economy while reducing its debt.

Rome, which fell under the EU’s excessive deficit procedure this year, aims to bring its deficit below the European Union's 3% of gross domestic product (GDP) ceiling by 2026, down from a targeted 3.8% this year and 7.2% last year.

Italy's parliament, where Meloni holds a significant majority, will begin a debate on the 2025 budget on Tuesday, which must be approved by December 31.

"Each of us is aware of the responsibility we have on our shoulders, and we will honor, to the last day, the task given to us by the Italians in this nation," Meloni stated at a meeting of her Brothers of Italy party in Rome.

Ratings agencies Fitch and DBRS upgraded Rome's outlook to "positive" from "stable" in October, citing an improved fiscal path.

Investors find the country's high bond yields attractive, given the stable political situation and the likelihood of continued rate cuts by the European Central Bank.

The premium investors pay to hold Italian government bonds over top-rated German ones narrowed on Friday to around 113 basis points, down from more than 240 basis points on September 26, 2022, when Meloni's coalition won the general election.

This positive sentiment in the Italian bond market contrasts with neighboring France, where a political crisis poses a challenge to reducing its deficit, leading to a credit rating downgrade by Moody's (NYSE:MCO).

INTERNATIONAL CREDIBILITY

Meloni, who announced her resignation on Sunday as president of the European Conservatives and Reformists (ECR) party, emphasized that the stability of her government is Italy's "greatest element of strength" as it "guarantees international credibility".

However, despite decreasing annual budget deficits, Italy’s debt—proportionally the second-highest in the 20-nation bloc—is expected to rise from 134.8% of GDP last year to 137.8% in 2026, before gradually declining.

Concerns also linger about economic growth, with recent figures pointing to an annual rate of nearly half of 1% projected.

The 2025 budget allocates funds for stimulus measures, including income tax cuts for lower earners, while nearly 4 billion euros ($4.20 billion) will be generated from changes to taxes on banks and insurance products.

According to amendments seen by Reuters, the government is scaling back plans to cut about 4.6 billion euros from the automotive industry funds between now and 2030 by restoring 200 million euros a year in 2026 and 2027.

Additionally, the government will maintain the capital gains tax on cryptocurrency at 26% next year and will increase it to 33% in 2026 and subsequent years.

Italy's web tax will focus on large tech companies while excluding small and medium-sized enterprises (SMEs) and publishing groups.

($1 = 0.9522 euros)