By Giuseppe Fonte, Alvise Armellini and Angelo Amante

ROME (Reuters) -Italy’s government plans to raise 3.5 billion euros ($3.81 billion) from domestic banks and insurers, Prime Minister Giorgia Meloni said on Tuesday after her cabinet approved budget plans for the next three years.

The money raised would be earmarked for the national health service and the most vulnerable, Meloni wrote on the X social media platform.

Officials previously said the levy on the financial sector would derive from a change in the taxation of stock options for managers and in the rules governing banks’ tax credits stemming from past losses, known as deferred tax assets.

Italy’s largest bank and insurance companies include Intesa Sanpaolo, UniCredit, Banco BPM, Monte dei Paschi di Siena and Generali.

The Treasury said in a statement that the budget for 2025 included measures worth 30 billion euros – primarily permanent cuts to income tax and social contributions for middle- and low-income earners.

Rome has said it would widen next year’s deficit to 3.3% of gross domestic product from an estimated 2.9% based on current trends, borrowing an extra 9 billion euros to fund the package.

The government did not provide full funding details for its 2025 budget on Tuesday, with the Treasury citing plans to rationalise state spending as well as the levy on banks and insurers.

DEFICIT TO FALL, DEBT TO RISE

Talk of a bank levy had swirled for weeks and weighed on lenders’ shares in the absence of clarity from the government.

Economy Minister Giancarlo Giorgetti last week said a contribution from banks “shouldn’t be considered blasphemous.”

Italy last year shocked markets by imposing a 40% tax on banks’ windfall profits, only to backtrack by limiting the scope of the levy and giving lenders an opt-out clause which meant that in the end it raised zero for state coffers.

The new bank levy will “not frighten the markets,” Foreign Minister Antonio Tajani wrote on X.

For 2025, the government also plans to hike excise duties on diesel and eliminate some tax breaks for companies related to the main corporate tax IRES, according to officials.

Italy is under an EU disciplinary procedure due to a budget deficit last year of 7.2% of GDP, far above the bloc’s 3% limit and the highest in the euro zone.

Last month the government pledged to lower the deficit to 2.8% of GDP in 2026, hoping this would allow Italy to exit the procedure in 2027.

On the other hand, Italy’s debt, already the second highest in the euro zone, is seen gradually climbing over the next two years, reaching 137.8% of GDP in 2026 compared with last year’s 134.8%.

The EU’s recently revamped fiscal rules require a steady pace of deficit and debt reduction from 2025 over four to seven years.

To secure EU approval for a less ambitious seven-year budget adjustment, Italy committed to reforms in several policy areas, including making the tax system more efficient.

($1 = 0.9185 euro)

(Editing by Deepa Babington)

---