MediumIV Macro Policy & Sovereign Debt2 October 2026, Friday · 22:20 TRT (UTC+3)

Italy raises next year's budget deficit target to 3.4%

Italy's Council of Ministers approved the Public Finance Programme Document (DPFP) on the evening of 2 October. It keeps the 2026 deficit at 2.9% but raises the 2027 target from 2.8% to 3.4%. The difference comes from defence and energy flexibility worth 0.6% of GDP requested from the EU.

Location: ROME

According to Sky TG24, the Council of Ministers approved the document at 21:20 on 2 October. It puts the deficit at 3.4% in 2027, 3.2% in 2028 and 2.3% in 2029; excluding the flexibility, the 2027 deficit is 2.8% and the 2028 deficit 2.6%. Il Fatto Quotidiano, however, reported 3.3% for 2028 and 2.4% for 2029; the 0.1-point gap between the two sources could not be reconciled. Public debt is projected at 138.1% of GDP in 2026, peaking at 138.5–138.6% in 2027.

The government is seeking flexibility of 0.6% of GDP a year in 2027 and 2028 under the EU's national escape clause, the exemption that keeps defence and crisis spending outside the deficit rule. According to Il Fatto, that comes to €14.4 billion a year, split evenly between defence and energy at €7.2 billion each. According to a Reuters report on the morning of 2 October, the defence share in the August draft had been 0.9% of GDP. Il Fatto wrote that the earlier defence request could have reached €22 billion.

Economy Minister Giorgetti raised the growth forecast from 0.6% to 1% for 2026 and from 0.6% to 0.8% for 2027. According to a Reuters report published on Euronext, Giorgetti argues the deficit excluding defence and energy spending stays below 3%, and aims to exit the excessive deficit procedure in mid-2027. The same report said Giorgetti was monitoring the situation day by day and that caution was needed.

Talay assessment

Bottom line

Rome completes its return below 3% in 2026, only to climb back to 3.4% in 2027 under the EU defence exemption. Cutting the defence share from 0.9% to 0.3% shows that, under bond market pressure, military spending pledges are the first item to be sacrificed. The most likely path is that the Commission approves the flexibility and Italy exits the procedure in mid-2027.

Likely effects

European defence spendingNegative1–6 months
Italy cutting its defence flexibility from 0.9% to 0.3% of GDP shows pledges to raise defence spending running into budget constraints in highly indebted member states.
Euro area bond spreadsNegativeWeeks
A 2027 deficit of 3.4% and debt peaking at 138.5% could add a risk premium to periphery spreads at a time when France is also under pressure.
Turkish defence exportsNegative6 months+
Slower growth in European defence budgets could limit the rise in demand Turkish defence firms are seeking from EU joint procurement programmes.

Possibilities, ranked

1
Commission approves flexibility60%
The Ecofin of 8–9 October and the November budget opinion accept the flexibility, and Italy exits the procedure in mid-2027.
Watch: The Commission's November opinion on Italy's draft budget
2
Flexibility stays conditional25%
The Commission does not count the 0.3% energy share as crisis spending, and exit from the procedure slips to 2028.
Watch: A written Commission reply declining to recognise energy spending under the escape clause
3
Market penalty15%
The higher deficit target widens the BTP spread markedly, and the government adds savings in the budget law at the end of October.
Watch: The 10-year BTP-Bund spread exceeding 120 basis points

Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.

Market reaction

Indicators affected

2027 deficit target (was 2.8%)▼ 3.4% of GDP
Annual EU flexibility request▼ €14.4 bn
2027 debt peak▼ 138.5% of GDP

Bottom line

Likely effects

Possibilities, ranked

Sources