Italy misses 2025 deficit and debt targets in blow to PM Meloni

Italy's Fiscal Performance and Economic Outlook

By Antonella Cinelli and Giuseppe Fonte

ROME, March 2 (Reuters) - Italy's budget deficit last year failed to fall inside the European Union's ceiling as targeted by the government, data showed on Monday, casting a shadow over Rome's hopes of an early exit from an EU disciplinary procedure.

Deficit Figures and Government Response

The 2025 fiscal deficit came in at 3.1% of gross domestic product (GDP), down from 3.4% in 2024 but just above the EU's 3% limit, national statistics bureau ISTAT said.

Economy Minister Giancarlo Giorgetti blamed the worse-than-expected result on spending related to costly home-renovation incentives introduced in 2020, which still weigh on state coffers, and said he did not rule out revisions to the data.

ISTAT said the figures could be reviewed by April 21 if additional information becomes available.

As recently as last week, Prime Minister Giorgia Meloni told Bloomberg she expected a 2025 deficit "below 3%".

Rome Stuck in EU Disciplinary Procedure

A 3.0% deficit, as forecast by Rome, could have allowed an exit from the EU's so-called Excessive Deficit Procedure (EDP) later this year, a year ahead of schedule, removing some constraints on spending as Meloni gears up for a 2027 election.

Debt Levels and Future Targets

Italy's public debt, proportionally the second-highest in the euro zone after Greece's, also missed the government's target last year, ISTAT reported, rising to 137.1% of GDP from 134.7% the year before.

The government had targeted 136.2% for 2025 and has pencilled in 137.4% for this year.

Getting out of the EDP was crucial for Italy's plans to boost defence spending in line with commitments agreed with EU and NATO allies.

Rome had said that, once freed from the EU procedure, it would tap an EU "escape clause" designed to increase the bloc's military expenditure, potentially pushing its deficit back above the 3% limit without triggering new disciplinary steps.

Italy targeted the 2026 deficit at 2.8% of GDP in its latest budget framework unveiled in September.

The document envisaged an increase in defence spending worth roughly 0.5% of GDP - or more than 10 billion euros - over three years through 2028.

Weak Growth Despite EU Funds

The euro zone's third largest economy grew by 0.5% in 2025, ISTAT also reported, matching the government's most recent, downwardly revised target.

Italy is forecasting growth of 0.7% this year, which would be a fourth consecutive year of sub-1% growth despite a steady inflow of billions of euros of EU-post-COVID 19 recovery funds.

ISTAT marginally revised up the 2024 growth rate to 0.8% from 0.7% but lowered the 2023 rate to 0.9% from 1%.

Domestic Demand and Trade Flows

Last year's modest growth was founded on domestic demand, boosted by investments and firm consumer spending. Trade flows, on the other hand, dragged down the growth rate, with imports increasing far more than exports.

Tax Burden and Political Implications

The politically sensitive "tax burden," measuring taxes and social contributions as a proportion of GDP, rose last year for a second year running to 43.1%, providing ammunition to opposition parties who accuse Meloni of failing to deliver promised tax cuts.

The tax burden was up 0.7 points compared to 2024 and above the 42.8% forecast by the government.

(Reporting by Antonella Cinelli and Giuseppe Fonte in Rome, Sara Rossi in Milan, graphics by Stefano Bernabei, editing by Gavin Jones)