The right and the left fail to understand that the 3.1 per cent deficit is not due to growth but to out-of-control spending

The right-wing and left-wing interpretations of the excessive deficit – a matter of a single decimal place – are opposing yet identical. And for this reason, they are both wrong. In both cases, in fact, both the government and the opposition attribute the failure to meet the 3 per cent deficit-to-GDP ratio target to a lack of growth. The only difference is who is to blame: for the government, the fault lies with Istat, which underestimates nominal GDP, whilst for the opposition, it is the government’s fault that GDP is not growing fast enough. Neither analysis is correct, because the real cause of the overshoot is spending. The issue is not so much political as it is arithmetic.

“I regret that on the very same day that Istat reports that our deficit stands at 3.08 per cent, it also announces that it is revising its growth forecasts for 2024,” said Prime Minister Giorgia Meloni. “It has happened every year that, after a year, the growth forecasts have been revised upwards,” added the Prime Minister. “I don’t know whether Istat is underestimating Italians or the government; I wouldn’t want the same thing to happen in three years’ time.”

For the former Prime Minister and leader of the M5S, Giuseppe Conte, however, the Istat figures “confirm that four years of cuts and austerity, zero growth, record levels of taxation, a race to rearm and disastrous agreements signed by the government have left Italy in a straitjacket and prevent us from exiting the excessive deficit procedure”. He therefore calls for a change of approach: rather than spending less to curb the deficit, we need to spend more to boost GDP. Similar views have been expressed by the PD’s economics spokesperson, Antonio Misiani, who argues that it is not a case of excessive spending that has kept Italy in the excessive deficit procedure, but rather “the country’s anaemic growth”. This result, Misiani said in an interview with La Repubblica, “highlights the limitations of an economic policy focused solely on the stability of public finances”.

The central thread running through the arguments put forward by Meloni, Conte and Misiani is that a little more GDP growth would have been enough to bring the deficit below 3 per cent. No one has pointed the finger at the unexpected rise in expenditure: an additional 2.5 billion in the 22 September revision and 8.4 billion in the 22 April revision. These are the real factors that threw the forecasts off course and caused the 3 per cent target to be missed.

Underlying this error of perspective is likely the belief – which is arithmetically unfounded – that, when defining the deficit-to-GDP ratio, changes in the numerator or denominator count for roughly the same amount. If, instead of reducing debt, GDP increases, the result remains the same. In fact, it changes significantly, because for a change in the denominator (GDP) to have an effect on the result, it must be much larger than the change in the numerator (debt). Essentially, if debt changes by 2 billion, the deficit-to-GDP ratio changes significantly, whereas if GDP changes by 2 billion, nothing statistically significant happens to the deficit-to-GDP ratio.

This is exactly what happened with the Istat revision. GDP has been revised upwards by 7 billion euros, whilst debt has increased by 0.35 billion: the deficit-to-GDP ratio has remained unchanged at 3.1 per cent (indeed, if rounding is disregarded, it has risen slightly: from 3.07 to 3.08 per cent). Underlying this seems to be the belief that a 0.1 per cent increase in GDP is enough to reduce the deficit by 0.1 per cent. However, a simple calculation using the absolute figures for debt and GDP shows that this is not the case.

The current deficit of 3.1 per cent is the result of the ratio between a debt of around 70 billion and a GDP of around 2,265 billion. To achieve a deficit of just under 3 per cent, with GDP (the denominator) remaining at 2,265 billion, the debt (the numerator) would need to be 67.5 billion: this represents the 2.5 billion in expenditure that appeared as unforeseen investment costs. If, on the other hand, we were to aim for a deficit-to-GDP ratio of just under 3 per cent by increasing the denominator (GDP) whilst keeping the numerator (debt) at 70 billion, then GDP would need to be 2,341 billion: that is, 76 billion more than the current level. That is an increase of around 3.5 percentage points of GDP. This would mean that, compared with the 2024 GDP of 2,210 billion, Italy would have seen nominal growth of 6 per cent in 2025: more than double the actual rate.

The government surely cannot believe that Istat could have so grossly underestimated the growth that has actually taken place, whilst the opposition surely cannot believe that the government could have grown the economy at Chinese rates. The reality, however, is that the reason for the 3.1 per cent deficit does not lie in lower-than-expected growth but in out-of-control spending. This is what politicians do not want to see, but which the maths cannot hide.