UPDATE 3-Italy's cabinet approves 2020 budget that cuts taxes, targets evaders

Italy's government approved a draft 2020 budget that cuts taxes for middle-earners and aims to crack down on tax evaders, while holding the deficit at the same level as this year.

The package was agreed in Wednesday's early hours at a cabinet meeting of the anti-establishment 5-Star Movement and its centre-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 over 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 finance bill aims for the 2020 deficit to remain at 2.2% of gross domestic product for a third consecutive year. To meet the 2021 deficit target of 1.8% of GDP, the government offered Brussels new so-called "safeguard clauses", pencilling in valued-added tax hikes worth some 19 billion euros unless it can find alternative resources to cut the deficit.

The budget includes income tax cuts for middle-earners which will cost state coffers some 3 billion euros in 2020. To help finance the tax cut, the government 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 also trims civil service spending and introduces a tax on plastic packaging, intended to help the environment. The budget bill 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.

BRUSSELS' VERDICT The budget 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 the version finally approved by the cabinet lowered this to between 3 and 4 billion euros.

The budget introduces sanctions for retailers and service providers that do not accept credit cards and lowers to 2,000 euros from 3,000 the threshold above which it is illegal to make cash transactions. That ceiling will fall to 1,000 euros from 2022.

The government will also legislate to increase the maximum prison sentence for tax evasion to 8 years from 6 years, Deputy Economy Minister Antonio Misiani said. 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 aims to raise around 600 million euros each year, the draft showed.

The tax, applied on 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) (Editing by Mark Heinrich)

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