Italy Targets 3% Budget Deficit for 2025, Nearing EU Fiscal Rules

Italy's Fiscal Outlook Improves for 2025

Italy is forecasting its budget deficit for 2025 to be approximately 3% of its Gross Domestic Product (GDP), or potentially even lower. This projection, which aligns with the European Union's fiscal rules, could enable Italy to exit an excessive deficit procedure by mid-2026, a year ahead of schedule. The updated forecast represents a reduction from an earlier estimate of 3.3% of GDP for 2025.

The improved outlook is largely attributed to higher-than-expected tax revenues and reduced interest payments on sovereign bonds. The Italian government is currently finalizing its multi-year budget plan, which is expected to be unveiled this week.

Adherence to EU Fiscal Requirements

The European Union's Stability and Growth Pact (SGP) mandates that member states maintain budget deficits below 3% of GDP and national debt below 60% of GDP. A deficit exceeding this threshold is considered excessive, triggering an Excessive Deficit Procedure (EDP).

Italy has been under an EDP, with disciplinary budget steps initiated by Brussels in 2024. The procedure restricts a country's flexibility in taxation and spending policies, requiring a prescribed amount of fiscal deficit reduction each year. Meeting the 3% target for 2025 would be a significant step towards fulfilling the EU's recommendations to end the excessive deficit situation by 2026.

Government's Strategy and Economic Context

Economy Minister Giancarlo Giorgetti has previously indicated the possibility of the deficit falling below the 3% ceiling, stating, 'The opportunity to exit the procedure is real, and it is in the country's interest to seize it.' The government's 2025 budget law, approved by parliament, aims to balance EU demands for deficit reduction with pledges to cut taxes for low- and middle-income earners.

Key measures within the budget include:

• Tax cuts and social security contribution reductions for low- and middle-income earners, totaling approximately 30 billion euros.
• A reduced corporate tax rate from 24% to 20% for businesses that increase hiring or reinvest profits.
• A 1,000-euro bonus for new parents with household incomes up to 40,000 euros per year, aimed at boosting the declining birthrate.

While Italy's public debt remains high, projected to rise slightly from 135.8% of GDP in 2024 to 136.9% in 2025, the focus on deficit reduction is a critical component of its fiscal strategy. The European Commission has praised Italy for its ability to present a 2025 budget law 'in line' with common recommendations and rules, and a 'credible' and 'sustainable' debt repayment plan.