Italy has announced plans to increase spending on energy and defense to boost economic growth ahead of next year’s elections, according to the government. The increases, permitted through specific budget clauses, will raise expenditures by 0.6% of GDP for both 2027 and 2028. While these changes align with prior forecasts and slightly adjust growth projections to 0.6% in 2027 and 0.8% in 2028, analysts at Oxford Economics suggest the timing is strategic ahead of the 2024 elections. However, defense investments typically have a low fiscal multiplier, limiting their actual impact on economic activity. The allocation of funds toward energy infrastructure also reflects Italy’s broader strategy to enhance energy security amid ongoing geopolitical tensions affecting European energy markets.
EU Regulatory Framework
The European Commission’s current evaluations should not be disrupted by these future spending increases, according to regulatory experts. If Italy maintains a deficit below 3% this year, it could exit the excessive deficit procedure (PDE), a key step that grants access to the European Central Bank’s transmission protection instrument (TPI). This tool is critical for shielding Italy from debt volatility risks and preventing a systemic financial crisis. Yet the government’s margin for maneuver is razor-thin, as even a 0.1 percentage point deviation in 2025 could trigger re-entry into the PDE.
A mere 0.1 percentage point deviation in 2025 was sufficient to keep the country within the PDE framework, highlighting the extreme precision required in budgetary calculations. This narrow margin shows the fragility of Italy’s fiscal position and the constant pressure to balance reformist ambitions with EU compliance. The TPI’s effectiveness in stabilizing borrowing costs hinges on Italy’s continued adherence to these stringent rules, making the 2025 deficit target a key determinant of financial stability.
Fiscal Challenges and Debt Risks
These measures leave Italy’s fiscal position precarious. The government has exhausted its budgetary flexibility, meaning any new commitments, such as promised tax cuts for the middle class, would require offsetting spending reductions elsewhere. Projected deficits are expected to reach 3.4% in 2027 and 3.2% in 2028, with public debt likely remaining stable rather than declining. Given current high bond yields, there is a 25% estimated chance that Italy’s debt-to-GDP ratio will rise over the next decade due to higher borrowing costs. This risk is exacerbated by the current trajectory of interest payments, which may outpace nominal GDP growth, perpetuating the “snowball effect” that threatens long-term fiscal sustainability.