Italy's Prime Minister Giorgia Meloni has had to make difficult choices as the government prepares its 2024 budget
Italy's Prime Minister Giorgia Meloni has had to make difficult choices as the government prepares its 2024 budget AFP

Italian Prime Minister Giorgia Meloni is tightening the budgetary screws to show that Rome can balance its books, even if it means delaying electoral promises.

By the government's own admission, the room for manoeuvring is extremely limited due to lower tax receipts from a slowing economy that risks deficit forecasts being revised upwards.

"Waste must be reduced, the few resources we have must be spent in the best possible way," Meloni has repeatedly said as her government draws up its 2024 budget to send to Brussels in mid-October.

The Brothers of Italy leader took office at the helm of a hard-right coalition in October with promises of tax cuts and help for families and businesses struggling with high inflation.

To boost the public coffers, her government abolished an anti-poverty measure, the so-called "citizens income", levied a windfall tax on bank profits and opened the door to new privatisations.

But the surprise drop in GDP of 0.4 percent in the second quarter, the headwinds experienced by Italy's main trading partner, Germany, and the delay in delivery of European Union post-pandemic funds are all weighing heavily on public coffers.

The government has already shelved indefinitely an election promise to extend a 15 percent "flat tax," which currently benefits entrepreneurs, to employees.

Another plan that has fallen by the wayside is a promise to ditch a 2011 law fixing the retirement age at 67.

A temporary scheme allows Italians to stop working at 62 if they have contributed to their pension for 41 years.

The government is, however, keen to renew a tax cut for lower incomes at a cost of around 10 billion euros ($10.7 billion) and -- a priority for the self-described "Christian mother" -- to offer more support for large families.

Despite their differences, Meloni and her main coalition partner, Matteo Salvini's far-right League party, are so far working together and insist they will not fall prey to the political instability that has led to almost 70 governments running Italy since World War II.

"To date, Meloni's government seems very stable. In the absence of a unified opposition, the government could go on until the end of the legislature" in 2027, said Valerio De Molli, head of think tank The European House - Ambrosetti.

But it faces similar financial pressures to previous Italian governments, notably the highest debt of any eurozone country barring Greece, at 144 percent of gross domestic product.

Meloni is aiming for a budget deficit of 4.5 percent of GDP for 2023, down from 8.0 percent in 2022, but this is looking increasingly tricky.

A 2024 target of 3.7 percent of GDP also appears out of reach.

An additional weight on the budget is Italy's "Superbonus" scheme, a tax incentive to boost measures to make homes more energy efficient.

Introduced in 2020 under Giuseppe Conte's government as a way of boosting the economy after the coronavirus pandemic, its costs have ballooned to more than 100 billion euros, Meloni said this week.

Rome had been hoping that a suspension of EU budget rules after the pandemic would be extended into next year, but Economy Commissioner Paolo Gentiloni has ruled this out.

Brussels is hoping to reach agreement instead this year on a reform to the EU's Stability and Growth Pact, which limits countries' budget deficits to three percent of their GDP and debt levels to 60 percent of GDP.

"A return to the old rules would be dramatic," Meloni warned this week.