Italy's Budget Faces Risks
Noor van Dalen
2026-10-22
Italy's efforts to stabilise its public finances are facing renewed challenges. The Bank of Italy has warned that planned increases in government borrowing during 2027 and 2028 could delay the country's exit from the European Union's excessive deficit procedure.
Although Rome expects its budget deficit to fall below the EU's 3% threshold in 2026, higher expenditure in subsequent years could complicate its financial recovery. The warning highlights the difficulties European economies face when balancing fiscal discipline with growing spending commitments.
Why Italy Faces Budget Concerns
European Union rules generally require member states to keep annual government deficits below 3% of gross domestic product (GDP). Italy has struggled to meet this requirement in recent years and remains subject to the excessive deficit procedure, which places additional scrutiny on countries with significant budget imbalances.
Economy Minister Giancarlo Giorgetti has made ending this oversight an important objective. The government expects its deficit to reach 2.9% of GDP in 2026, bringing it below the European ceiling for the first time since 2019. However, maintaining this improvement could prove difficult.
Deficit Forecasts Raise Questions
Italy's latest projections indicate that the deficit could increase to 3.4% of GDP in 2027 before declining to 3.2% in 2028. The expected increases reflect plans to expand defence expenditure and introduce measures addressing higher energy costs.
Rome intends to use flexibility available under EU budget rules, including the national escape clause, which permits certain temporary increases in spending.
The government plans additional borrowing equivalent to approximately 0.6% of GDP annually in 2027 and 2028. However, the Bank of Italy has warned that relying on these provisions could complicate efforts to demonstrate lasting financial stability.
Why EU Flexibility May Not Be Enough
The central bank has identified an important distinction in European budget regulations. Certain exemptions can prevent a country from entering the excessive deficit procedure when temporary spending increases push its deficit above the usual limit. However, the same flexibility does not automatically allow a country already subject to the procedure to leave it.
Italy could therefore face difficulties securing approval for its exit, even if additional expenditure qualifies for permitted exceptions.
European authorities must be satisfied that improvements in public finances are sustainable.
A temporary reduction below 3% may be insufficient if future deficits are expected to exceed the threshold again.
Previous Figures Complicate Recovery
Italy had hoped revised historical figures would strengthen its case for an earlier exit. However, national statistics agency ISTAT confirmed in September that the country's 2025 deficit remained at 3.1% of GDP.
The result disappointed government expectations that the figure might be revised downwards.
With the 2026 deficit projected at 2.9%, there is limited room for unexpected expenditure or weaker tax revenue.
The Bank of Italy has consequently emphasised the importance of maintaining careful oversight of public finances.
What Happens Next For Italy?
The European Commission will assess whether Italy's deficit reduction represents a lasting improvement before deciding whether to end the additional budget supervision.
For the government, the challenge involves maintaining financial discipline while meeting expenditure commitments.
The outcome could influence future borrowing plans, public investment and confidence in Italy's financial outlook.
Italy's experience also illustrates the challenges facing European economies as temporary spending flexibility intersects with longer-term deficit reduction requirements.
Upcoming budget assessments will help determine whether Rome has made sufficient progress to leave the excessive deficit procedure.
