Italy’s fiscal outlook shows significant improvement, with revised projections indicating a budget deficit of approximately 3% of GDP in 2025, a more favorable position than the previously estimated 3.3%. This upward revision, detailed in the government’s public finance planning document submitted to parliament, is attributed to stronger-than-anticipated tax revenues. Such fiscal discipline, if sustained, could allow the Eurozone’s third-largest economy to conclude the European Union’s excessive deficit procedure a year ahead of the initial timeline.
The EU’s excessive deficit procedure is a mechanism designed to ensure member states adhere to the bloc’s fiscal rules, specifically the 3% deficit-to-GDP limit. Countries subjected to this procedure face constraints on fiscal policy, impacting their ability to implement tax cuts or increase spending, all with the aim of maintaining sustainable deficit levels and safeguarding the stability of the eurozone economy. Italy’s situation is being monitored alongside other nations currently under similar scrutiny, including France, Austria, Belgium, Hungary, and Poland. The EU’s final assessment of each member state’s fiscal performance, including Italy’s, is slated for spring 2026.
This enhanced fiscal trajectory has not gone unnoticed by international financial bodies. European Central Bank President Christine Lagarde, in a September interview, acknowledged Italy’s “very serious budgetary efforts” and expressed an expectation that the country would soon exit the EU procedure, reaching a deficit close to 3%. Furthermore, credit rating agency Fitch Ratings responded by upgrading Italy’s long-term debt rating to ‘BBB+’ from ‘BBB’ in September, citing increased confidence in the nation’s fiscal trajectory and commending the government’s commitment to its fiscal targets under the new EU framework.
Despite these positive developments, Italy continues to contend with a substantial debt-to-GDP ratio. While projections for 2026 place this figure below the previous target of 137.8% of GDP, it is anticipated to reach 136.4% by 2028. Economic growth projections for Italy are set at 0.5% for 2025, following a 0.7% expansion in 2024. The forecast for 2026 is 0.7%, a figure contingent on broader geopolitical developments and international trade policies, particularly concerning US tariffs.
In line with its electoral commitments, the Italian government plans to implement tax reductions for middle-income earners in the upcoming fiscal year. Additionally, the budget includes provisions for increased defense spending, scheduled to rise to 0.15% of GDP in 2026, further to 0.3% in 2027, and ultimately reaching 0.5% by 2028.
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