By Valentina Za and Giuseppe Fonte

ROME/MILAN, Nov 12 (Reuters) - Italy's biggest bank Intesa Sanpaolo on Thursday strongly criticised punitive tax measures on banks planned in Rome's 2027 budget, warning they could prompt the ECB to ask domestic lenders to lower their exposure to sovereign debt.

Chief Executive Carlo Messina told a parliamentary committee the measures were in part contrary to Italy's constitution, and would trigger legal disputes with the country's lenders.

He also accused the government of adopting a "South American approach," arguing that limits on tax credits stemming from previously granted home-renovation incentives were a way of restructuring the country's massive public debt.

"It is clear that we operate in a context where, if there is a constitutional issue, our shareholders will raise the issue of constitutionality," Messina said.

MATTER OF JUSTICE

Italy plans to collect €5.9 billion ($6.54 billion) from the financial sector to help fund tax cuts and spending hikes in next year's budget, rising to €12 billion through 2029.

Responding to Messina's comments, Prime Minister Giorgia Meloni said the higher taxation was "a matter of justice" given a difficult economic environment marked by rising living costs and interest rates.

"There are businesses that have done well in recent years, thanks in part to government measures and the stability that Italy has provided. So let's try to help each other out," she told reporters in Dublin.

The Bank of Italy said on Thursday that the planned tax hikes will increase uncertainty and affect investment decisions.

Meloni's government has repeatedly said in recent years ‌that ⁠banks' large profits mainly stemmed from the ECB rate hikes and state guarantees on loans put in place by previous administrations in the wake of the COVID-19 pandemic.

EYES ON THE ECB

Messina on Thursday took aim in particular at a government measure that spreads over 10 years more than €20 billion in tax breaks which under current legislation are available to taxpayers, financial and non-financial firms in 2027.

These tax credits are linked to incentives for home renovations undertaken in 2023.

"Under ECB rules this is called forbearance ... in a little while they'll come, as they do, and tell us to cut government bonds," Messina said.

The Bank of Italy also warned the provision could have a significant impact on banks' 2026 earnings.

Italy expects a critical legal opinion on the budget from the ECB, people familiar with the matter said.

Economy Minister Giancarlo Giorgetti said he was open to changes to the budget, currently before parliament, adding that the home-renovation incentives had taken a heavy toll on state finances.

($1 = 0.9027 euros)

(Reporting by Valentina Za in Milan and Giuseppe Fonte in Rome, editing by Alvise Armellini and Gavin Jones)

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