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Italy eyes tighter fiscal rules for banks' loan losses - sources

Duomo's cathedral and Porta Nuova's financial district are seen in Milan

ROME (Reuters) - Italy is considering reducing the amount of loan losses that banks can deduct from their taxable income next year, two sources close to the matter told Reuters on Monday, as it looks for ways to finance an expansionary 2020 budget.

Rome is struggling to find resources to avoid a hike in sales tax worth some 23 billion euros (20.6 billion pounds), due to kick in from January, which could hurt already weak domestic demand.

The government may raise cash by tightening the tax treatment governing the writedown of problem loans which still clog the balance sheets of Italian lenders, the sources said, speaking on condition of anonymity.

The coalition of the anti-establishment 5-Star Movement and centre-left Democratic Party is due to approve its draft 2020 budget on Tuesday, the deadline by which the document must be sent to the European Commission for approval.

In the budget, Italy aims not only to avert the hike in sales tax but also to cut income tax on workers in the form of a rebate which will cost state coffers some 3 billion euros next year and rise to 5.5 billion euros in 2021.

In addition, it will reduce charges for hospital tests and increases income support for poorer families with children, government officials have said.

To help finance these measures, the coalition has put together a raft of measures to curb rampant tax evasion which costs the state some 109 billion euros every year, according to Treasury estimates.

(Reporting by Giuseppe Fonte and Stefano Bernabei, editing by Gavin Jones and Deepa Babington)