UPDATE 2-Italy's cabinet approves 2020 budget that cuts taxes, cracks down on evaders

Italy's government approved a draft 2020 budget in the early hours of Wednesday that aims to cut taxes for middle-earners and crackdown on tax evaders while holding the deficit at the same level as this year, government officials said.

The package was agreed at a cabinet meeting of the anti-establishment 5-Star Movement and its center-left coalition partner the Democratic Party. It will now be sent to Brussels for scrutiny by the European Commission. The budget scraps a hefty increase in sales tax worth 23 billion euros ($25 billion) which had been scheduled to take effect in January, but which the coalition feared would push Italy's already-stagnant economy into recession.

However, since setting the economic targets that provide the framework for the budget in September, the ruling parties have struggled to agree on many of the measures to adopt. "It's an expansionary budget, we are satisfied", Prime Minister Giuseppe Conte said after the cabinet meeting. "It's a substantial plan to combat tax evasion."

The government approved income tax cuts for middle-earners, costing state coffers some 3 billion euros in 2020. The finance bill aims for the 2020 deficit to remain at 2.2% of gross domestic product for a third consecutive year.

To help finance the measures, the government has put together a plan to curb rampant tax evasion which costs the state some 109 billion euros every year, according to Treasury estimates. The budget must be presented to parliament by Oct. 20 and approved in both houses by the end of this year. It remains to be seen whether it will be rubber-stamped by the European Commission.

The package sees the structural deficit - which strips out the effects of economic growth fluctuations - rising by 0.1 percentage points of GDP next year, reversing a commitment made in July to reduce it by 0.6 points. The drive to combat tax evasion seeks to encourage the use of easily traced credit and debit cards rather than opaque cash transactions.

The plan had originally aimed to raise 7 billion euros, but Economy Minister Roberto Gualtieri said on Wednesday that had been lowered to 3 billion. The budget draft seen by Reuters introduces sanctions of up to 2,000 euros for retailers and service providers that do not accept credit cards. It lowers to 2,000 euros from 3,000 the threshold above which it is illegal to make cash transactions. The amount is expected to be cut to 1,000 euros from 2022.

To encourage people to ask retailers for receipts, the budget also launches a lottery in which holders of the winning receipts, identified with a number, get a tax-free cash prize. Such "receipt lotteries" have already been adopted in several countries including Portugal, Slovakia, and Malta.

A new "web-tax" on digital companies also aims to raise around 600 million euros each year, the draft showed. The tax, applied to companies with annual global revenues of at least 750 million euros and digital services exceeding 5.5 million euros in Italy, obliges them to pay a 3% levy on internet transactions conducted in Italy.

($1 = 0.9074 euros)