Debt set to rise again in 2027 (138.5 per cent). Giorgetti: caution is needed

The additional deficit arising from the clause on energy and defence expenditure adds to the cash burden of the Superbonus, and pushes back the return to a falling debt-to-GDP ratio by another year. Contrary to what had been forecast in the Spring Public Finance Document, the debt-to-GDP ratio will in fact rise by four decimal points even in 2027, when it will reach 138.5 per cent, before changing direction and falling to 137.9 per cent, once the legacy of building tax credits has been phased out, and to 136.6 per cent in the following two years.
This is the main news to emerge for the markets following last night’s Cabinet meeting, which approved the Public Finance Policy Document (DPFP) and the report on the deviation. And with an eye very much on the bond markets, which had just emerged from a turbulent week, Giancarlo Giorgetti, at the press conference following the Cabinet meeting, once again urged a high degree of caution.

Indeed, it falls entirely to the Minister for the Economy to outline the characteristics of a ‘particularly complex context’, which makes it ‘increasingly difficult’ both to ‘make forecasts’ and to ‘stay on track with public finances’. On this basis, Giorgetti states on the record the need for ‘a more cautious approach than that announced’, as reported in the newspapers in the list of promises and previews of the latest budget before the elections; because the scenario, shaken by inflation and global government bond sales, ‘requires greater attention’. In Brussels, it is indeed possible to negotiate breakdowns and calculation criteria, but investors are interested in the overall figures and the direction of travel: on which, moreover, a not insignificant variable weighs heavily, because 2028, with its declining budget balances, rests with the majority that emerges from the vote.

Even in light of the discussions with the Commission, as had been expected in the run-up to the decision, the clause has been activated only partially, 29 billion rather than 36, with the waiver (temporary, Minister Crosetto hopes, whilst also making it clear that he ‘fully understands the reasons behind the decision’) of approximately 7 billion for 2028. But inevitably, this is enough to push up net borrowing, which, after the 2.9 per cent of GDP confirmed for this year, will rise to 3.4 per cent next year, before edging down to 3.2 per cent the following year and falling to 2.3 per cent in 2029: without the clause, it would stand at 2.8 per cent and 2.6 per cent. With the strict application of EU rules – which do not allow countries subject to the excessive deficit procedure to exclude the extra deficit from their balance calculations – Italia would therefore only exit the corrective arm of the EU Pact in 2030. However, negotiations have been ongoing for some time with the EU on a more flexible approach, which Giorgetti seems to take for granted.

Excluding the exemption, split equally between green investments and rearmament (0.3 per cent of GDP per year for each item in both 2027 and 2028), the deficit would show a slight decline, to 2.8 per cent next year (confirming the trend forecast in April) and to 2.6 per cent in 2028, one decimal point above the spring projections.
Here we can see the effect of rising interest expenditure (yesterday’s *Il Sole 24 Ore*), in the wake of the rises in yields already seen in recent weeks and those forecast for the near future, against a backdrop of inflation and its restrictive impact on the interest rates set in Frankfurt: where, as the Minister for the Economy noted in response to a question from journalists, it is necessary to ‘clarify the situation as soon as possible’ following rumours of President Lagarde’s possible resignation. The interest factor becomes even more evident in the figures for 2029, which exclude the extra deficit arising from the clause: the deficit for that year is now projected at 2.3 per cent of GDP, rather than the 2.1 per cent forecast five months ago, and debt stands at 136.6 per cent rather than 136.3 per cent, despite the upward revision of gross domestic product levels carried out by Istat, which reduces the baseline figure represented by this year’s data by five decimal places (from 138.6 per cent to 138.1 per cent).
However, the entire framework drawn up by the Ministry of the Economy is characterised by a sense of caution, certainly heightened by this year’s surprises, which on two occasions have ruled out the possibility of an early exit from the excessive deficit procedure. The 2026 deficit – crucial for ensuring the flexibility mechanism runs smoothly – is, as mentioned, confirmed at 2.9 per cent, even though growth of 1 per cent is significantly higher than the 0.6 per cent forecast in the spring, just as inflation is higher, driving up nominal GDP, the denominator of the ratio. For next year, the Government is forecasting +0.8 per cent, two decimal places above the spring trend, though this is influenced by the expected impact of the budget, which includes an additional deficit of 14 billion (0.6 per cent of GDP). The growth forecast for 2028 (0.9 per cent) is also one decimal point higher than the previous forecasts, whilst the +0.8 per cent already predicted in April is confirmed for 2029.

The other impact of inflation is felt on net primary expenditure, the key indicator under the new EU fiscal rules. The rise in prices is driving up expenditure on pensions and the universal child allowance, which are index-linked. Consequently, according to the calculations announced yesterday by Giorgetti at a press conference, this indicator is set to rise by 3.3 per cent next year, exceeding the trajectory agreed with the EU in both annual (1.9 per cent) and cumulative (2.8 per cent) terms. This has given rise to the request – which, under pressure not only from Italy, is expected to be discussed next Friday at the Ecofin meeting in Luxembourg – to take this ‘significant factor’ into account when assessing compliance with the constraints; however, the inflationary impact of this is mitigated by the fact that, under European parameters, the tax windfall – that is, the increase in revenue resulting from nominal income growth – is considered ‘discretionary revenue’ and therefore has a positive effect on the balance. ‘We are not asking for further flexibility,’ Giorgetti clarifies; in other words, the request is not to run an additional deficit, but to be able to avoid restrictive measures (which would reduce the deficit but weigh on growth) that would otherwise be necessary to stay on the agreed path.