Concerns raised by UPB, Istat and the Bank of Italy regarding the deficit and the country’s exit from the infringement procedure

Yesterday, the Bank of Italy (BdI), Istat and the Parliamentary Budget Office (Upb) appeared before the Budget Committees of the Senate and the Chamber of Deputies to give their views on the 2026 Public Finance Policy Document (Dpfp), the text through which the government sets out the macroeconomic and financial framework within which the new Budget Law is to be prepared. Approved by the government on 2 October, it will be examined by Parliament today alongside the budget deviation to cover increased expenditure on defence and energy security, amounting to approximately 29 billion in 2027 and 2028. In this regard, the three independent institutions have emphasised that next year, as a result of the increase in expenditure in line with what is permitted under the National Safeguard Clause, the deficit will rise to 3.4 per cent, thereby halting the decline in the deficit that began in 2021. However, excluding these expenditure items permitted under the Clause, the deficit is forecast to remain below the 3 per cent threshold. This year, it is expected to stand at 2.9 per cent; a figure deemed credible by both the Bank of Italy and the UPB. Nevertheless, the margin relative to the limits set by European procedures remains narrow: just one decimal place. The UPB’s president, Lilia Cavallari, has warned the government: “Even minor deviations towards the end of 2026 could jeopardise the exit from the procedure”, a scenario the government has already encountered with the 3.1 per cent figure for 2025.

The Bank of Italy has acknowledged that the new resources may reduce the country’s strategic dependencies, whilst noting, however, that deficit financing would slow the reduction in the debt-to-GDP ratio. Interest expenditure, driven in part by refinancing at higher rates, is set to rise in the coming years, although the long maturity of the securities will mitigate the initial impact. But already this year, the cost of debt is forecast to rise by 11.2 per cent compared with last year, from 87.2 billion to 96.9 billion (4.2 per cent of GDP). By 2027, it is expected to rise to a total of around 103.7 billion, and by 2028 it is projected to reach around 4.6 per cent of GDP, or 112.3 billion. It is no coincidence that Palazzo Koch pointed out that, for a country so heavily in debt, growth – and therefore the quality of spending – is of paramount importance, noting that additional resources will boost productivity if they are invested rather than used for current expenditure, whilst also hinting at the possibility of high-return, high-risk projects that the private sector might not support. Furthermore, the UPB noted that in 2027, excluding expenditure covered by the safeguard clause, the DPFP envisages utilising the full increase permitted under European rules, leaving no scope for new measures, which may need to be covered by further cuts or increased revenue.

One of the main concerns, however, arises once the flexibility period ends, after 2028. The government is planning a significant fiscal adjustment in 2029, which is necessary to consolidate the reduction in debt. Defence spending also covers personnel and multi-year programmes, but the Dpfp does not specify whether the increase in 2029 will be offset elsewhere or not. In this regard, the UPB has called for the Budget Law to clarify which commitments will continue and how they will be funded. On growth, the UPB has endorsed the government’s estimates, which forecast GDP growth of 1 per cent this year and 0.8 per cent in 2027 – a scenario deemed ‘consistent’ by the Bank of Italy as well. As for 2028 and 2029, with growth of +0.9 per cent and +0.8 per cent respectively, the UPB has described the estimates as optimistic, forecasting instead a rise in GDP of 0.7 per cent in 2028 and 0.6 per cent in 2029, partly due to the end of the boost provided by the NRRP.

Istat has highlighted the rise in energy prices: compared with the baseline scenario, a 50-basis-point rise in interest rates in 2027 and 2028, greater uncertainty and a slower decline in oil and gas prices would result in a loss of 0.2 percentage points of growth in 2027 and 0.4 percentage points in 2028.

The UPB has calculated that real wages remain some 9 percentage points below 2020 levels. According to Istat, the recovery stalled in the second quarter of 2026 and, for this year, it forecasts that collectively agreed wages – in the absence of further renewals – will rise by 2.5 per cent against an already realised inflation rate of 3 per cent. The institute’s president, Francesco Maria Chelli, noted, however, the positive performance of the tourism sector, given that in 2025 Italy became the EU’s leading country in terms of visitor numbers (535.5 million), ahead of Spain (in 2019 it was fourth).