Key facts
- Italy will scale back its planned increase in defense spending in its new budget.
- The government will hike this year's growth estimate to close to 1% from 0.6%.
- Next year's growth is expected to be little changed from the current estimate of 0.6%.
- The 2026 budget deficit will be estimated at 2.9% of GDP, below the EU's 3% ceiling.
- From 2027, the deficit is expected to rise again as Italy intends to use a "national escape clause" (NEC).
- Italy will reduce the extra spending for defense to 0.6% of GDP from a planned 0.9%.
Italy is set to revise its economic forecasts upwards for the current year and has decided to reduce planned increases in defense spending as part of its upcoming budget, according to sources. This move aims to manage the country's substantial public debt, which is projected to become the highest in the euro zone.
The government will release new multi-year economic forecasts on Friday, which will underpin the 2027 budget. Prime Minister Giorgia Meloni is navigating a challenging economic environment for the euro zone's third-largest economy, marked by rising energy prices, increasing borrowing costs, and a public debt expected to surpass Greece's this year.
Despite these challenges, Italy's economy performed better than anticipated in the first half of the year. Meloni indicated that the government will raise this year's growth estimate to nearly 1%, up from the 0.6% projected in April. Growth is expected to slow next year, likely remaining around the current 0.6% estimate.
The budget deficit for 2026 is projected to be 2.9% of GDP, or slightly lower, falling below the European Union's 3% ceiling for the first time since 2019. However, the deficit is anticipated to increase from 2027 as Italy plans to utilize a "national escape clause" (NEC) from EU budget rules. This clause, available to all EU countries for defense spending and energy cost mitigation, will be used less extensively by Italy than initially planned.
Rome had previously sought an additional deficit of 1.5% of GDP, approximately €36 billion through 2028, to fund increased defense spending and energy support. While the full deficit allowance for energy costs (0.6% of GDP) will be utilized, the allocation for defense will be reduced to 0.6% of GDP from the previously planned 0.9%. This translates to approximately €14 billion annually for 2027 and 2028.
Hiking military spending is an unpopular measure in Italy and creates divisions within the ruling coalition. The government is also cautious about excessive spending increases due to its public debt, which is targeted to peak for a third consecutive year in 2026 at nearly 139% of GDP. Economy Minister Giancarlo Giorgetti is reportedly in discussions with the European Commission to ensure these deficit adjustments do not hinder Italy's exit from an EU budget disciplinary procedure in mid-2027.
In related developments, Meloni recently urged the EU to provide greater budget flexibility to help member states cope with inflation driven by energy prices. Italian inflation rose to 4.1% in September from 3.2% in August.