Italian Public finances show gradual improvement
Italy’s public finances are showing signs of steady improvement. According to a report by the Unimpresa Research Center, the deficit-to-GDP ratio could fall to 2.7% in 2026, slightly below the government’s target of 2.8%.
This improvement would be supported by three key factors: lower interest rates, slightly stronger economic growth and a resilient labor market.
The report also notes that a potential conflict involving Israel, the United States and Iran—if limited to a few weeks—would likely have only a temporary and limited impact on European and Italian economic prospects.
Lower interest rates easing pressure on public debt
A major factor supporting the improvement of public finances is the shift in ECB monetary policy.
After the restrictive phase launched in 2022 to combat inflation, interest rates have gradually declined. The ECB deposit rate, which reached 4% in 2023, fell to 2% in 2025.
This shift has reduced the cost of borrowing for governments. The average yield on 10-year Italian BTP bonds, which ranged between 4.5% and 5% in 2023, stabilized around 3.5-3.7% in 2025.
According to estimates from Italy’s Ministry of Economy and the Bank of Italy, a one-percentage-point decline in borrowing costs could lead to billions of euros in interest savings over time.
Economic growth slightly stronger than expected
Economic growth also plays a role in improving the fiscal outlook.
The Italian government expects 0.7% real GDP growth in 2026, but projections from the European Commission and the OECD place growth between 0.9% and 1%.
Even a small increase above official forecasts can significantly improve public finances by boosting tax revenues and reducing the relative weight of the deficit.
Strong labor market supports tax revenues
The Italian labor market remains another key pillar supporting public finances.
In 2025 the employment rate exceeded 62%, while the number of employed people remained above 23.5 million, according to ISTAT data.
This growth in employment strengthens both social contributions and tax revenues, helping stabilize government finances.
Deficit falling after pandemic peak
Italy’s fiscal trajectory shows a steady improvement after the pandemic.
The deficit has declined from more than 9% of GDP in 2020 to:
- 3.4% in 2024
- 3.1% in 2025
- 2.7% projected for 2026
If confirmed, Italy would return below the EU’s 3% deficit threshold.
Public debt remains the main challenge
Italy’s public debt remains high at 137.1% of GDP in 2025.
However, the return of a positive primary balance (0.7% of GDP) and nominal growth above 2% could help stabilize the debt ratio.
Most projections suggest a possible turning point in the debt trajectory starting in 2027.
Iran conflict unlikely to alter macroeconomic outlook
According to Unimpresa, a short-term geopolitical conflict involving Iran would likely cause only temporary volatility in energy prices and financial markets.
A structural economic impact would occur only in the event of prolonged disruptions to global energy supplies.
This post is also available in: Italiano (Italian)