Italy changes plans to increase defence spending

Italy will publish new multi-year economic forecasts on Friday, raising its estimate for this year’s growth and, in a last-minute decision, scaling back earlier plans to increase defence spending in order to keep its massive public debt under control, sources said.

The figures will form the basis for the government’s budget for 2027 later this month, which Prime Minister Giorgia Meloni is drafting against a difficult backdrop for the eurozone’s third-largest economy.

The 2026 budget deficit will be estimated at 2.9% of gross domestic product or slightly lower, from 3.1% last year, also broadly confirming the current target of 2.9% and falling below the EU’s 3% limit for the first time since 2019.

From 2027, however, the deficit is expected to rise again, as Italy aims to benefit from the so-called “national escape clause” (NEC) from the EU’s budget rules.

This relief has been offered to all EU countries to help them increase their defence spending and cope with the rising energy costs caused by the war in Iran, but Italy will use it less than previously planned, the sources said.

Rome’s current target for the deficit-to-GDP ratio for 2027 is 2.8%.

The government said in August that it wanted to use the NEC to secure additional deficit worth 1.5% of GDP, or around €36 billion by 2028, a plan it is now scaling back by reducing the defence component.

Meanwhile, in a constantly developing situation, Meloni this week sent a letter to the EU asking it to provide “additional flexibility” in the budget rules to help governments cope with an energy-driven rise in inflation.

Italian inflation rose to 4.1% in September from 3.2% a month earlier. Meloni has asked the EU to allow member states to finance support measures through additional revenues stemming from so-called “fiscal drag”, whereby inflation and nominal wage growth increase the share of taxes paid on incomes.