Low growth, new debt, interest rates: in Italy, ingredients for budgetary unsustainability

Brussels – Italy has everything it takes to scare the eurozone: growing debt, expenditure exceeding revenue, and increased spending to cover interest on the debt. It has practically everything it needs to make its budget situation unsustainable. This is how the Commissioner for Economic Affairs, Valdis Dombrovskis, described the situation in his response to a parliamentary question presented by the European Liberals (RE) on the general level of public deficits in the euro area. 

“The ability to finance interest expenditure is one of the factors determining budget sustainability,” Dombrovskis began. In this specific case, “although Italy and Spain have primary surpluses, these are lower than interest expenditure, and the surplus is financed by new debt.” Italy is therefore issuing new debt to repay its existing debt, and interest expenditure is expected to increase to 3.9 per cent of gross domestic product (GDP) in 2025, 4 per cent in 2026, and 4.1 per cent in 2027, according to the European Commission’s estimates.  

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A recipe for an increasingly vicious spiral, then. This is also because, as the Commissioner for Economic Affairs added, “the level of debt and its expected dynamics over time are another key aspect to consider.” For Italy, the debt trajectory is growing steadily: 133.9 per cent of GDP in 2023, 134.9 per cent in 2024, 136.4 per cent in 2025, expected to reach 137.9 per cent this year. Fortunately for the country, this figure is expected to reverse the trend in 2027 (137.2 per cent of GDP). This is because the lack of growth also complicates the situation. 

“The differential between the average interest rate that the government pays on its debt and the rate of economic growth is a crucial variable for debt dynamics,” Dombrovskis pointed out. For Italy, economic forecasts at hand, the outlook is far from rosy: 0.4 per cent in 2025, the second-lowest growth rate for this year, and the lowest in 2027. Low growth, rising debt, new debt to cover other debt, and more expenditure to pay interest on old and new debt. The state of Italian public finances, therefore, remains precarious.