Every cloud has a silver lining. Staying at 3.1 per cent avoids resorting to debt-fuelled measures

Istat has confirmed that the deficit-to-GDP ratio for 2025 has not fallen below 3 per cent. This is bad news, as Italy will not be able to exit the excessive deficit procedure ahead of schedule – an exit that was, in fact, scheduled for next year. The good news is that the primary surplus – that is, the balance net of interest expenditure – rose in 2025 to 0.8 per cent, compared with 0.5 per cent the previous year, which is what matters in terms of bringing us closer to the planned debt reduction trajectory. As is well known, the 2025 deficit was weighed down by the lingering cost of the Superbonus – an irresponsible gift from those aspiring to remain in government in the next parliamentary term – and by interest on the debt.

But what is the significance of this bad news, beyond the loss of the reputational benefit that would have come from Italy’s early certification of its restored fiscal stability?

The practical implication will essentially be that the derogation granted by Brussels for environmental and defence spending – up to approximately 36 billion over the next two years (1.5 per cent of GDP) – in the event of an exit from the infringement procedure, whilst still counted towards the public deficit, would not automatically lead to a return to the infringement procedure should the 3 per cent threshold be exceeded again. As the country remains subject to the procedure, it will still be able to incur this expenditure as an exception to the established path for net expenditure; however, the increase in the deficit will be assessed ‘normally’ and will make it more difficult to return to below 3 per cent and, above all, to remain there.

Therefore, this additional expenditure – the amount of which will be decided in the forthcoming Budget Bill, even though it is in any case permitted as a deviation from planned expenditure – will take away from other expenditure, or will have to be covered by other revenue, if the aim is to remain below 3 per cent over the next two years. In reality, we are faced with a tangle of rules and clauses that are complex to interpret, in the classic Brussels tradition, but this represents an additional problem – at least in terms of communication – for a government approaching a general election.

However, if we step back for a moment from the debate surrounding the European rules of the Stability Pact and the set of its derogation clauses – whilst still showing due respect for the rules and clauses themselves – it is worth remembering that the additional expenditure in question would, in any case, have been incurred as debt. This is not an accounting issue, but a substantive one. The derogations granted by Brussels, however they may be interpreted, do not alter the fact that this is national debt, not European debt. This is not a trivial matter, because what matters is substantive fiscal consolidation, which affects the risk premium demanded by those financing Italian debt and which will weigh on the interest payable on the stock of debt issued each year, whether as a roll-over of maturing debt or as additional debt.

This is no minor issue at a time when all sovereign debt is, if not yet under attack, certainly under close scrutiny in the financial markets. And these markets are sophisticated enough to look beyond the technicalities of European fiscal rules to assess, beyond the accounts, the expected sustainability of sovereign debt based on the track record of the governments in power and their policies.

From this point of view, one might wonder whether the saying ‘every cloud has a silver lining’ applies. In other words, the reduced scope for spending dictated by the new Istat figures in order to comply with European rules may well give greater strength to those within the government who are determined to resist pressure for an ‘expansionary’ Budget Law – in the sense of increased debt-financed spending – which would risk squandering the hard-won reputation that Italy, even more so than the government itself, has earned.

Some unforeseen expenditure will be unavoidable, not only for defence but also for measures needed to tackle the energy crisis. However, the hope is that this will be limited to what is strictly necessary – that is, expenditure which the financial markets can also recognise as helping to strengthen the economy and, consequently, the sustainability of the debt. And nothing more.