Italy adopts fiscal plan with €28B flexibility for energy and defence

Cabinet approval and escape clause

Premier Giorgia Meloni's cabinet approved the Public Finance Planning Document (DPFP) on Friday, setting the multi-year fiscal framework for the Italian budget. Alongside the planning document, ministers authorized a request to activate the National Escape Clause in Parliament. The flexibility requested by the government amounts to approximately €14 billion for 2027 and €14 billion for 2028. This deviation accounts for 0.3% of gross domestic product for defense and 0.3% for energy annually across both years. Economy Minister Giancarlo Giorgetti explained during the post-cabinet press conference that the administration decided to scale back its planned defense outlays compared to targets considered a few weeks earlier.

This deviation is quantified at 0.3% for energy and 0.3% for security for 2027, with a similar forecast for 2028.

Deficit targets and EU fiscal rules

The baseline deficit is projected to come in below 3% of GDP in 2026. Factoring in supplementary spending permitted under European fiscal regulations, the headline deficit is projected to rise to 3.5% in 2027, decline to 3.3% in 2028, and fall to 2.4% in 2029. Giorgetti addressed Italy's path out of the European Union excessive deficit procedure. European Commission rules permit member states to deduct specific deviations for energy and defense investments from the deficit calculation. Giorgetti noted that deducting the 0.6% deviation leaves the underlying deficit below 3% for both 2027 and 2028, which could facilitate Rome's exit from the procedure.

The deficit should remain below 3% in 2026 as well, but as you know, that is not enough; taking into account the additional spending permitted by European rules, our forecasts show it rising to 3.5% in 2027, 3.3% in 2028, and 2.4% in 2029.

Debt trajectory and revised growth

The government revised its 2026 GDP growth projection upward to 1.0%, replacing an initial conservative estimate of 0.6%. Growth is projected to reach 0.8% in 2027, 0.9% in 2028, and 0.8% in 2029. Giorgetti noted that forecasting has become increasingly difficult due to complex international conditions across multiple fronts. Italy's public debt ratio is projected to stand at 138.1% of GDP in 2026, rising to 138.6% in 2027 before declining to 137.7% in 2028 and 136.3% in 2029.

Macroeconomic monitoring and central bank remarks

The Ministry of Economy and Finance is monitoring inflation and interest rate movements continuously. Giorgetti stated that shifting conditions require a more cautious approach than in preceding months. Asked by reporters about media reports suggesting European Central Bank President Christine Lagarde might resign to pursue a candidacy in French presidential elections, Giorgetti urged institutional clarity without evaluating internal decisions.

I do not enter Governor Lagarde's head, but I believe that clarity is appropriate on this matter.