Italy sees debt-to-GDP ratio rising through 2026 in new budget plan

By Giuseppe Fonte and Marta Di Donfrancesco

ROME (Reuters) - Italy's public debt will only start decreasing as a proportion of economic output from 2027 despite expected falls in the deficit, the Treasury said on Friday, outlining Rome's multi-year budget plan.

Italy's debt, already the second largest in the euro zone as a share of GDP and under close scrutiny from markets, is set to rise through 2026 from last year's 134.8% of GDP due to costly home renovation incentives, Rome said in a statement.

Without these incentives, which exceed 200 billion euros ($220 billion), the debt ratio would have been 1.2 percentage points lower, it added.

Italy's medium-term structural budget plan, to be presented to the European Commission next month after parliamentary approval, sets this year's budget deficit target at 3.8% of national output, below the 4.3% estimated in April.

"We aim to follow a prudent and responsible budget policy," the Treasury said.

After declining to a projected 3.3% of GDP next year, below a previous 3.6% goal agreed with the EU, the deficit is seen at 2.8% in 2026, below the EU's 3% ceiling.

The figures factor in revisions to economic growth data for 1995-2023 unveiled this week, which gave a modest boost to Prime Minister Giorgia Meloni's government.

Italy was put under an "excessive deficit procedure" by the EU this year, as its 2023 fiscal deficit came in at 7.2% of GDP.

The government also needs to comply with the latest reform of the bloc's fiscal rules, which requires slow but steady cuts in the headline deficit and debt from 2025 over four to seven years, depending on reform commitments and strategic investments.

To this end, the Treasury said it planned to limit the average annual increase in Italy's net primary expenditure, an indicator that measures spending components under the government's direct control, to close to 1.5%.

"From 2027, debt will begin to fall in line with new EU rules that call for an average reduction of 1 percentage point of GDP following the exit from the excessive deficit procedure," the Treasury said.

($1 = 0.8945 euros)

(Editing by Toby Chopra and Kevin Liffey)