• Italy asks EU to consider inflation when judging budget compliance, as it aims to exit excessive-deficit procedure in 2027.
  • Rome plans a €29 billion budget deviation for 2027–2028, split between energy and defence, raising the 2027 deficit to 3.4% of GDP.
  • EU acceptance is not guaranteed, and the outcome could influence borrowing costs and fiscal credibility.

A Request for Inflation Adjustment

Italy is pushing the European Union to account for unexpectedly high inflation when assessing its budget targets, according to people familiar with the matter. Economy Minister Giancarlo Giorgetti clarified that the request is not for a new category of flexibility but rather for inflation to be reflected in nominal expenditure paths set when inflation was lower. Prime Minister Giorgia Meloni had earlier called for “additional flexibility” to address energy-driven inflation.

The ask comes as Rome tries to secure a delicate balance: providing relief to households and businesses while maintaining a credible path out of the EU’s excessive-deficit procedure. As of October 7, Italy still targets a 2026 deficit of 2.9% of GDP, but its newly approved fiscal plan raises the projected 2027 deficit to 3.4%, making EU agreement on spending flexibility crucial.

A Fiscal Plan Under Pressure

On October 2, the cabinet approved its Public Finance Policy Document and a proposed budget deviation worth approximately €29 billion across 2027–2028, split roughly equally between energy measures and defence. This is scaled back from the approximately €36 billion envisaged in August. Parliamentary consideration is scheduled for October 13.

The plan combines somewhat stronger near-term growth with renewed borrowing and a delayed decline in public debt. The government now projects real GDP growth of 1.0% in 2026, revised from 0.6%, and 0.8% in 2027. The headline deficit is seen at 2.9% in 2026, 3.4% in 2027, 3.3% in 2028, and 2.4% in 2029. Public debt is projected at 138.1% of GDP in 2026, 138.5% in 2027, and 137.9% in 2028, only starting to decline in 2028.

Compliance Argument vs. Reality

Giorgetti has argued that subtracting the proposed 0.6-percentage-point allowance from the 2027 headline deficit of 3.4% yields an underlying deficit of 2.8%, below the EU’s 3% threshold. But that is Rome’s compliance argument—not evidence that the actual deficit becomes 2.8%, nor that the EU has approved that interpretation. The EU’s acceptance remains unresolved, and negotiations are ongoing over whether the extra spending can coexist with an exit from the excessive-deficit procedure in mid-2027.

Independent analysis from BNP Paribas (BNP.PA) identifies EU-funded investment and household consumption as supports for growth, while highlighting weak manufacturing and tight fiscal spending margins. Its assessment reinforces the distinction between a modest growth improvement and a durable solution to Italy’s debt constraints.

Political and Market Implications

The policy sits at the intersection of EU fiscal oversight, energy security, and domestic electoral politics. Meloni faces a national election in 2027, and rising public discontent over living costs has made fiscal space for relief politically valuable. Higher military spending is unpopular and divides the governing parties; the reduced defence allocation responds partly to pressure from the Lega.

For households, the immediate issue is purchasing power and energy affordability. For businesses, Meloni has proposed approximately €14 billion over two years to reduce energy costs. Taxpayers and bond investors face the other side of the trade-off: additional borrowing and a longer wait for the debt ratio to fall. Reuters (TRI) reports rising government borrowing costs alongside higher energy prices; Italy’s large debt stock limits its room to respond without increasing financing pressures.

The request follows several years of deficit reduction after the pandemic. The deficit fell from 9.4% of GDP in 2020 to 3.4% in 2024 and 3.1% in 2025. The latter still exceeded the EU threshold, keeping Italy within the excessive-deficit procedure. Cash payments associated with the Superbonus housing programme continue to burden public finances, though Giorgetti expects those payments to end in 2028, helping the debt ratio resume its decline.

What to Watch

In the short term, the decisive developments are EU negotiations, parliamentary consideration of the fiscal framework on October 13, and the detailed 2027 budget later this month. Giorgetti has signalled a more cautious approach to budget measures than previously envisaged.

Over the longer term, three issues matter: whether energy support can be balanced with fiscal credibility, how the EU treats the proposed allowance, and whether growth and financing risks remain contained. The government forecasts only 0.8%–0.9% annual growth during 2027–2029, while borrowing costs are rising. That leaves limited room for disappointing growth or more expensive debt servicing.

The headline should therefore be read as a negotiating position: Italy wants inflation-sensitive enforcement of its spending commitments, but the extent of any EU concession—and its effect on Italy’s fiscal-procedure exit—remains uncertain.

Correction: An earlier version of this article misstated the proposed budget deviation. It is approximately €29 billion, not €36 billion. The error was corrected on October 8, 2026.