Italy's fiscal performance has improved under the government of Prime Minister Giorgia Meloni, but the smaller fiscal deficits she has ushered in are unlikely to lead to a decline in government debt over the medium term given Italy's modest economic growth outlook and significant social and defense spending pressures. Meloni has presided over a stable (particularly by Italian standards) right-wing multiparty coalition government. Its policies have improved the market outlook on Italian policy credibility and finances, as reflected in improving sovereign credit ratings and narrowing credit spreads vis-a-vis benchmark German bonds. Fiscal discipline has helped reduce the deficit to close to prepandemic levels, and it will soon be below the EU limit of 3% of gross domestic product. Italian government debt has declined from its peak in 2020 largely due to the surge in post-COVID-19 inflation, which increased GDP, improving the debt-to-GDP ratio. Relative fiscal discipline under Meloni has also helped narrow fiscal deficits, though they still remain above prepandemic levels as a share of GDP. But while the deficit and spending have dropped since the pandemic, post-pandemic economic growth has not been as impressive. 

• In the September 2022 parliamentary election, the right-wing three-party populist alliance led by the Brothers of Italy won an absolute majority of 244 seats out of 400 in the Chamber of Deputies; Meloni's Brothers of Italy party controls nearly 116 seats. The government coalition also controls a majority in the Senate, where it has 120 out of 205 seats.
• In April, international credit rating agency Standard & Poor's lifted Italy's sovereign rating to BBB+ with a stable outlook; Fitch followed suit in September. With Moody's having attached a positive outlook to its Ba3 rating in May, a further credit upgrade is likely before the middle of 2026.
• Government debt peaked at 155% of GDP in 2020 but has since declined to 135% of GDP. Fiscal deficits peaked at almost 10% of GDP in 2020 but fell to 3.4% of GDP in 2024. By comparison, France's fiscal deficit reached 5.8% of GDP in 2024. In 2024, net government debt stood at 105% in France, 47% in Germany, 134% in Japan, 94% in the United Kingdom and 98% in the United States. Japan and likely Greece (which does not publish net debt data) are the only other advanced economies with higher debt than Italy.
• Real GDP growth in Italy was a mere 0.7% in 2023 and 2024, and economic growth is projected to remain below 1% a year until the end of the decade.

Despite an improving fiscal position, slowing growth and rising spending pressures will limit Italy's room for fiscal maneuver. Fiscal deficits are projected to decline barring significant policy changes in the run-up to the 2027 parliamentary election. But low economic growth and inflation will translate into stable rather than declining debt levels, measured as a share of GDP, over the next few years. Demographic headwinds point to a further slowdown in economic growth as well as a continuous increase in age-related government spending and the termination of pandemic-era EU financial transfers in 2026. Italy has also committed to significantly increase defense spending over the next 10 years. Barring productivity-enhancing structural economic reforms that counteract the effects of deteriorating demographics and institutional bottlenecks, such as a cumbersome legal system — or barring an unlikely acceleration of economic growth due to, for example, artificial intelligence — Italy needs to run (e.g., implement further fiscal adjustment) just to stand still (e.g., maintain government debt at current levels). 

• Italy's fiscal deficit has narrowed substantially since its COVID-19 peak and is on track to fall below the 3% of GDP limit set by euro area fiscal rules next year, according to the International Monetary Fund, while the Italian government expects the deficit to fall to below 3% of GDP this year. The IMF projects deficits to average around 2.5% of GDP in 2026-30, barring significant fiscal policy changes, but it also projected a slight increase in the debt-to-GDP ratio.
• A combination of low inflation and low economic growth will translate into a roughly unchanged to slightly higher debt-to-GDP ratio. By comparison, both France and Germany will see a tangible increase in their debt-to-GDP ratio, from 113% of GDP and 64% of GDP to 129% of GDP and 74% of GDP, respectively. Greece's debt ratio is projected to be lower than Italy's by the end of the decade.
• Italian 10-year government bond yields are now trading at the same level as in France, which continues to run a large fiscal deficit and faces a significant increase in government debt over the next few years. Italian government spreads are trading at or near their tightest level against benchmark German bunds (3.4% versus 2.6%) in years.

While the government's room for fiscal maneuver will remain tightly constrained financially, the political incentives to shift toward significantly less responsible fiscal policies will be limited until the 2027 elections, barring unforeseen shocks. The government would find it difficult, but not necessarily impossible, to respond to a significant shock that requires government finances to act as a shock absorber, such as a large-scale banking crisis. Italy could cope with a short-lived fiscal shock, depending on its magnitude. But a longer-lasting shock that required significantly higher levels of government spending or lowered Italy's already modest growth would put renewed strain on Italy's fiscal and debt position. The Meloni government has limited room for fiscal maneuver in view of the 2027 parliamentary election, but the government seems willing to act within these constraints given its recently proposed 2026-28 budget. Its relatively comfortable standing in polls has further diminished its interest in significantly priming the economy in next year's budget. A substantial economic downturn before the elections would change these calculations, perhaps causing the government to implement more far-reaching expansionary fiscal measures.

• Italy's parliamentary election will be held by September 2027. The coalition parties have not seen any erosion of their popularity: Meloni's Brothers of Italy is polling at above 30%, the Lega at 9% and the Forza Italia at 8%. The main opposition Democratic Party is at slightly above 20%, and the left-wing opposition remains fragmented. These polls suggest that the government coalition stands a fair chance of being returned to office in 2027. 
• The 2026-28 budget targets a fiscal deficit of 2.8% of GDP. While the government foresees defense spending increasing by 0.5% of GDP by 2028 and plans to hold off raising the retirement age for workers in strenuous jobs for three years, it imposed a one-off tax on banks to help offset increased spending. The additional spending measures announced in the 2026-28 budget amount to 0.7-0.8% of GDP. The government currently also intends to lower taxes somewhat, but this would not jeopardize the financial outlook. 

Continued high levels of debt will force Italian governments to make difficult choices over the next decade, especially amid more ambitious NATO spending plans. Even if Rome meets defense spending targets, Italy's defense industry will benefit less from increased spending than German or even French defense companies in euro terms, given Italy's smaller economic size and lower economic growth rate. It remains to be seen whether NATO governments will be able to increase defense spending to 5% of GDP by 2035 as agreed at the alliance's annual summit in June; Italy will certainly find this difficult to do. Italian defense spending amounted to 1.5% of GDP in 2024 and is projected to reach 1.6% of GDP this year. It would need to increase defense spending by a full 2% of GDP even to meet the core defense spending target of 3.5% by 2035. Given the projected increases to social welfare spending and limited room for revenue-raising measures, Italy's longer-term fiscal outlook remains significantly more uncertain than its short- and medium-term outlook. Even if Italy reaches 3.5% defense spending within the next decade, the absolute increase in expenditure will remain smaller than in Germany or France because Italy's economy is smaller, and because their defense sectors' products will soak up a larger amount of the new demand than Italy will garner.

• The Italian economy remains significantly smaller than France's and Germany's, at $2.5 trillion versus $3.4 trillion and $5 trillion, respectively. In terms of per capita income measured at purchasing-power parity exchange rate rates, Italy's income amounts to $63,000, compared to France's $67,000 and Germany's $75,000. This likely underestimates Italy's economic size and wealth, given that its informal economy is estimated to be larger than that of France and Germany.
• All NATO members are committed to increasing defense expenditure to 5% of GDP by 2035, which breaks down into 3.5% of GDP worth of core defense spending and 1.5% of GDP of security-related spending, including infrastructure and cybersecurity. Italian defense spending is projected to reach 1.6% of GDP for 2025. Italy's defense spending in 2024 reached $38 billion, compared to France's $65 billion and Germany's $89 billion.
• The IMF projects Italy's five-year real GDP growth to average a mere 0.7% by 2030, compared to 1% and 1.2% in France and Germany, respectively. Prepandemic, Italy's real GDP growth averaged 1%. If the IMF projections are correct, Italy will experience a further slowdown in economic growth over the next five years, which will maintain pressure on fiscal policy and public finances given lower revenue growth. It will also lead to lower increases in Italian defense spending in euro terms compared to France and Germany.