A view shows Milan's skyline during sunset in Milan, Italy, July 6, 2023. REUTERS/Claudia Greco

By Giuseppe Fonte

ROME (Reuters) -Italy's public debt will only start falling as a proportion of economic output from 2027, the Treasury said in its multi-year budget plan, while economic growth will take a significant hit next year due to U.S. trade tariff policy.

The debt -- the second highest in the euro zone after Greece's -- is targeted at 136.2% of gross domestic product this year from 134.9% in 2024, and seen rising further to 137.4% in 2026.

It will then decline marginally to 137.3% in 2027 and 136.4% in 2028 when it will still be above this year's level, according to the budget document seen by Reuters.

"The debt-to-GDP ratio at such a high level ...is an obstacle to future growth and intergenerational fairness, and it must be addressed," Economy Minister Giancarlo Giorgetti said in the document approved by the cabinet late on Thursday.

The budget plan targets the deficit to fall to 3% of national output this year, respecting the European Union's ceiling for the first time since 2019, before the COVID-19 pandemic, and below a previous target of 3.3%.

The improvement is being driven by stronger-than-expected tax revenues, which are expected to grow by 1.2% this year, up from 0.8% forecast in April, and lower debt servicing costs for the euro zone's third-largest economy.

The economic outlook is clouded by the negative impact of U.S tariffs, which are expected to subtract 0.1% from Italy's GDP this year, 0.5% in 2026 and 0.4% in 2027, in terms of deviation from a baseline scenario.

The budget plan marginally lowered the 2025 GDP growth target to 0.5% from April's projection of 0.6%, and trimmed next year's outlook to 0.7% from 0.8%.

The politically sensitive tax burden -- the level of taxes and social contributions as a proportion of GDP -- is expected to rise to 42.8% this year from 42.5% in 2024, and stand at 42.7% in both 2026 and 2027, well above the EU average of 40% .

Italy's tax burden is unevenly spread across income groups.

Taxation is low on some property and financial assets that are typical sources of income for the wealthy, while low-paid workers lose more of their gross wages to tax and social security contributions than in most other EU countries.

The full budget plan to be presented later this month will fund tax cuts and higher spending worth on average 0.7% of GDP or more than 16 billion euros ($18.78 billion) per year between 2026 and 2028, the document said.

($1 = 0.8521 euros)

(Editing by Gavin Jones)