Less growth and more debt: EU puts Italy in the spotlight and calls for reforms

Brussels – Lower-than-expected growth, held back by external factors and internal fragilities, and a fiscal consolidation trajectory that is only partly downward: while the deficit should decline, debt will follow the opposite path. The European Commission does not make rosy economic forecasts for Italy. The numbers and figures include some reminders for Giorgia Meloni and her government, which is urged to get its hands back on the political agenda for a change in pace.

Compared to May’s economic forecast, Brussels cuts growth estimates. By the end of the year, Gross Domestic Product (GDP) is forecast at +0.7 percent, and by the end of 2025, at +1 percent, a 0.2 and 0.1 percentage points cut, respectively, compared with previous estimates. In 2026, the growth trajectory will improve slightly to 1.2 percent. However, Italy is still expected to be at the bottom of the ranking for economic performance, with no other country performing growing less in 2026.

Efforts on deficit, increase in debt

The spotlight of the European Commission’s services is mainly on public accounts. On the one hand, it recognizes the effort to bring the deficit/GDP ratio back within the 3 percent threshold. However, the path will take two years. The ratio is expected to fall to 3.8 percent in 2024 (from 7.2 percent in 2023) before reaching 3.4 percent in 2025 and 2.9 percent in 2026. The reduction trajectory takes longer than expected due to the government’s choices, first and foremost, the reshaping of the Irpef tax.

In the case of Italy, the forecast says, “The draft budget includes measures with a deficit-increasing impact of 0.4% of GDP relative to the unchanged legislation scenario used by the national authorities.” These measures include the “prolongation of the cut in the tax wedge implemented in 2024, though through a new system of tax deductions and the confirmation of the streamlined personal income tax structure introduced in 2024.”

The debt chapter is a different story, with an increase expected compared to the commitments under the new stability pact. After falling to 134.8 percent of GDP in 2023, close to its pre-pandemic level, the debt-to-GDP ratio is expected to rise in 2024-26, reaching 139.3 percent at the end of the period “despite positive and rising primary balances.” This projected increase is driven by stock-flow adjustments related to the lagged impact on cash borrowing of the tax credits for housing renovations affecting previous years’ deficits while the interest-growth-rate differential becomes less favorable.

For Italy and its government, a note from Valdis Dombrovskis, the commissioner responsible for an Economy that serves people. “It is crucial that member states reduce public debt levels in line with the new fiscal rules” of the European Union.

The EU rejects the Superbonus, a blow to public finances

There is not just criticism from Dombrovskis. Paolo Gentiloni, the Commissioner for Economy, also remarks on the rising trajectory of Italy’s public debt. “There is no doubt that after a reduction in public debt following the pandemic, there has been a stabilization due to the impact of what we Italians call the ‘Superbonus’,” referring to the tax incentives for building renovations introduced by the Conte government and later confirmed. “The measure got out of control and ended up having a more negative than positive impact,” Gentiloni emphasizes, especially when considering the state of public finances.

Forward with the NRP

The underlying condition for Italy is the timely and effective implementation of the recovery plan (NRP), positively impacting the otherwise lackluster economic forecasts and helping improve the overall picture. Specifically, by 2025, the implementation of NRP-related measures and reforms will “accelerate, largely offsetting the restrictive stance of domestic fiscal policy.” Private consumption growth should gain momentum while overall investments should decline, driven by less construction activity for housing renovations. Recovery Fund-related spending and looser financing conditions should stimulate investment in 2026 along with continued consumption expansion.

For Italy and its government, another note from Dombrovskis: “It is crucial that member states implement all reforms and investments in their recovery plans.”

English version by the Translation Service of Withub