Goldman Sachs: 'Italy's deficit under 3% from 2026, there is the pensions knot'

Italian sovereign spreads have reached their lowest level in 15 years, benefiting from growing demand from foreign investors and, more recently, domestic financial groups. This is the starting point of the analysis on Italy by Filippo Taddei, Senior European economist at Goldman Sachs, who notes that since the start of the pandemic, the Italian economy has grown in line with the eurozone average, but "the relatively cautious fiscal stance has been key in anchoring investors' expectations".

The US investment bank therefore predicts that 'the fiscal deficit will continue to fall below 3 per cent of GDP from 2026'. There are three knots to be addressed in the Medium-Term Budget Structure Plan and the 2026 budget. First, the government must clarify how quickly it intends to increase defence spending to meet the NATO commitment. Second, the executive is seeking to reduce income tax for middle-income earners, offsetting this with a temporary tax increase on banks and share buybacks. Thirdly, the government aims to reduce migration flows and is considering limiting the automatic adjustment of the retirement age to increases in life expectancy.

In Goldman Sachs' analysis, 'increased defence spending and tax adjustments should not undermine Italy's fiscal trajectory, which currently looks encouraging. However, our simulations suggest that reducing net migration or freezing the statutory retirement age could compromise debt stabilisation from 2027.

Therefore, we expect that the government will only marginally change pension requirements as Italy's demographic structure is already the most complex in the Emu4 (France, Italy, Germany and Spain) and the European Recovery Fund will provide ample support over the next 15 months. Given the low productivity growth in Italy, we believe that support from the European capital-intensification programme and structural reforms represent the most promising path to debt stabilisation,' Taddei concludes.