By Giuseppe Fonte and Gavin Jones
ROME (Reuters) - The Italian cabinet on Monday approved a 2021 budget targeting a fiscal deficit of 7% of national output, compared with 10.8% this year, but two government sources said next year's goal will soon be hiked to allow for more economic stimulus.
The government has already allocated around 100 billion euros ($118 billion) this year to try to cushion the impact of one of the world's worst coronavirus outbreaks.
Rome is preparing a new spending package worth 15-20 billion euros likely to be presented this week which will push up the deficit in 2021, one of the sources said, asking not to be named.
Much of the extra spending this year was for temporary support measures such as grants to firms, loan guarantees and furlough schemes which were due to expire in coming months, paving the way for a reduction in borrowing in 2021.
However, with COVID-19 infections surging in recent weeks, Prime Minister Giuseppe Conte says supporting the economy is now paramount, undermining plans for modest fiscal consolidation.
Italy's public debt, proportionally the highest in the euro zone after that of Greece, is currently targeted to fall next year to 155.6% of GDP from 158% in 2020.
Expansionary measures in the 2021 budget total around 40 billion euros, including 15 billion euros of grants from the European Union's Recovery Fund.
The budget includes 4 billion euros in grants to compensate companies hardest hit by coronavirus lockdowns, and extends until June a moratorium on repayments of bank loans to small and medium-sized businesses.
An additional 5.3 billion euros will fund furlough schemes in the first half of next year, while a ban on dismissals due to expire in January is extended until the end of March.
The budget law will now go before parliament for debate and amendments, and must be approved in both houses by Dec. 31.