Budget: zero deficit by 2027 thanks to new measures. Funding is needed for the flat tax and personal income tax

For 2027 ‘there would be no need for a budgetary adjustment’, i.e. a cut in expenditure or an increase in revenue, partly because the ‘slight overshoot’ of the primary expenditure ceilings agreed with the EU ‘would be entirely absorbed by the activation of the national safeguard clause’. Only thereafter, ‘in 2028 and 2029, would budgetary scope become available for a moderately expansionary fiscal policy’. These few lines, written on page 59 of the Budget Policy Document sent by the Government to Parliament during the night between Friday and Saturday, illustrate quite effectively the reasons behind the additional dose of caution advocated on Friday evening by Giancarlo Giorgetti. Compared with the assumptions made a month ago, “I believe the approach must be more cautious, because the current context requires greater attention”, said the Minister for the Economy at a press conference, painting a picture in which many of the demands of a government facing an election seem set to give way to those of public finances grappling with inflation and rising interest rates: the two worst pieces of news for a highly indebted country.

The issue stems from the trajectory of net expenditure – the cap on outgoings (excluding interest payments, transfers and EU co-financing, cyclical anti-unemployment subsidies and one-off measures) agreed with the Commission to keep debt under control. The debate over the safeguard clause has somewhat overshadowed it in recent days. But the spending rule remains crucial for the ordinary budget. And there, as the Document states, the margins are future-oriented and moderate. To gauge them, one need only calculate the difference between the annual increases in net expenditure under current legislation and the limits set out in the Structural Budget Plan: this amounts to around 3.3–3.5 billion in 2028 and a further 2.5–3 billion the following year.

The increase in the income threshold for the 33 per cent IRPEF rate from 50,000 to 60,000 euros (2.7 billion), the reintroduction of flat-rate tax on contractual pay rises, shift work, night work, work on public holidays and productivity bonuses (2.6 billion), the flat tax on pay rises for young people, the refinancing of the health fund and the other measures mooted in the (theoretical) debate on the ‘electoral budget’ over the coming weeks will therefore need to be fully funded in order to be implemented without exceeding the projected deficit (net of the clause) and the spending ceilings. The structural reorganisation of the car tax cut raises somewhat less pressing issues, as it relies, for 2027, on a portion of the savings from the National Recovery and Resilience Plan (PNRR). Whatever remains of the Plan’s unallocated funds may help with the rest: not everything, however, given the estimates of between 2 and 4 billion that have circulated so far. Last year, too, for the first time in a long while, the budget did not envisage an additional deficit in the first year: but the elections were further away. And what about the extra deficit under the safeguard clause? Its contribution to the budget, with the obvious exception of measures relating to energy and defence, is marginal according to the document: by absorbing some expenditure already provided for in the long-term projections, the clause fully ‘offsets’ the ‘slight overshoot’ of the spending ceilings projected for 2027. In doing so, it spares the budget from having to address the correction of the accounts. However, it does not appear to free up any additional room for manoeuvre.

Nor does the impact on the economy appear to be huge. According to the details set out by the Government in the report on the budget deviation – which is due to be voted on 13 October once the Chamber of Deputies has concluded its work on the electoral law – the clause adds approximately 14.4 billion to the deficit for next year, and the same amount for 2028. However, the growth targets set out in the Dpfp add just 0.2 per cent to the GDP growth figure for 2027, which rises to +0.8 per cent from the trend figure of +0.6 per cent, and by one decimal point to that of the following year (to +0.9 per cent from the trend figure of +0.8 per cent). This figure can be explained by the cautious nature of the Ministry of the Economy’s macroeconomic models, which apply modest multipliers to expenditure; and, indeed, by the government’s planned use of this deficit, which – in the part earmarked to finance measures already provided for in the baseline projections (i.e. in the budget under current legislation) – will not provide a further boost to GDP. The higher deficit, on the other hand, pushes back the start of the decline in the debt-to-GDP ratio to 2028, whilst the bond markets are being shaken by the combined impact of inflation, expectations of further interest rate rises and waves of public and private bond issues.

The consequences of the new scenario are already evident in the Dpfp’s trend projections, which – even without taking new measures into account – point to an increase of 40.8 billion in total public expenditure and 14.7 billion in interest costs over the next three years (rising to 16.3 billion when the extra deficit is factored in) compared with the calculations in the April DPF. Revenue, for its part, is set to rise by 29.5 billion. All this is without taking into account possible further rises in inflation, which have already emerged from the end-of-September data. The accounting criteria adopted in Brussels do not affect these trends. These criteria, however, are decisive for the management of public finance constraints at the heart of the negotiations between Rome and the Commission. With the DPFP, Italia confirms its target of exiting the excessive deficit procedure in 2027, based on final 2026 figures showing a deficit of 2.9 per cent; and therefore expects that the actual implementation of expenditure under the clause in that same year will prompt the Commission to exclude the extra deficit from its calculations when assessing compliance with the 3 per cent ceiling. Excluding the derogation for energy and defence, the deficit stands at 2.8 per cent of GDP in 2027 and 2.6 per cent in 2028, thus remaining within a safe distance of the Maastricht criteria. Without this accounting exclusion – with the deficit reaching 3.4 per cent and 3.2 per cent over the next two years – Italia would remain in the corrective arm of the EU Pact until 2030, falling below 3 per cent only in 2029 (to 2.3 per cent).