Italy's budget gap widens as energy shock strains public finances
Money Moves
The cabinet approved a €26bn 2027 budget on 28 October, with the energy bills decree still pending while Brussels settles the rest of the energy flexibility.
On 28 October the cabinet approved a €26bn budget for 2027, which Rome says is about €2.5bn more than planned because Brussels allowed extra energy spending. Italy will pay for part of it with higher taxes on banks, insurers, energy firms and gambling operators. Banks' corporate tax (IRES) rises to 30.5%, and the deficit is projected at 3.4% of GDP in 2027.
The energy bills decree was pulled from the same meeting for technical changes. It would cap the gas price for power plants at €58.9 per megawatt-hour for 12 to 18 months. The budget goes to Parliament next, and the EU's final sign-off on the escape clause is expected on 10 November.
Why it matters
The eurozone's third-largest economy may soon carry the bloc's highest debt load, and its deficit choices will shape the EU's fiscal-policy debate.
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Key Indicators
€26bn
2027 budget size
Approved by the cabinet on 28 October, up from €23.4bn in the earlier draft because of extra EU energy flexibility.
~€58.9/MWh
Proposed gas price cap
Palazzo Chigi's figure for the cap in the bills decree, postponed on 28 October. It is set to last 12 to 18 months.
5.9%
IRAP rate on energy firms
Raised from 3.9% in February for 2026 and 2027. Reuters reported on 23 October that a further rise is under consideration.
27 events
Latest: October 28th, 2026 · 2 weeks ago
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October 2026
Cabinet approves €26bn 2027 budget
LatestPolicy
The cabinet approved the 2027 budget bill, worth about €26bn in 2027 and €27bn in 2028. Financial firms will pay over €5bn, and energy and gambling firms €700m each. Rome says the deficit rises to 3.4% of GDP in 2027.
Energy bills decree postponed
Policy
The cabinet postponed the decree on lowering electricity and gas costs for technical changes. It sets a gas price cap of €58.9 per megawatt-hour for 12, up to 18, months.
Brussels agrees energy flexibility using recovery-plan funds
Policy
The Commission approved moving about €3.4bn of recovery-plan measures into the energy flexibility. This frees money to spend outside the escape clause limits. Meloni said the result came from talks until the last minute.
Escape clause still awaits Council approval
Policy
The Commission has assessed Italy's escape-clause request and passed it to the Council. A Commission spokesperson said the final clearance is due on 10 November, and Rome is seeking an agreement on guidelines before then.
Treasury weighs higher tax on energy firms
Policy
Reuters reported, citing people close to the matter, that Italy may raise the IRAP tax on companies that produce, distribute and supply energy to fund tax cuts and spending in the 2027-2029 budget. The rate was already lifted to 5.9% from 3.9% in February for 2026 and 2027, worth about €1bn.
Italy and Commission reach understanding on bills decree
Policy
The government said it reached a common understanding with the European Commission on the measures in decree-law 21/2026, in line with the EU state aid framework. Italy will notify the temporary measures and the Commission will assess them as a priority.
Meloni says talks on bills decree completed
Statement
At a press point after the 15-16 October European Council, Meloni said negotiations with the Commission on the energy bills decree had concluded. She said the result allows the government to act on how electricity prices are generated and on the impact of gas costs.
EU summit takes on board Italy's energy priorities
Policy
EU leaders invite the Commission to examine and propose further measures to address soaring energy prices in the short term, taking into account member states' specific circumstances including electricity price differences.
EU gives preliminary green light to bills decree
Policy
The Commission says it is moving toward an agreement in principle that Italy's bills decree does not violate state aid rules. The decree aims to limit how gas costs feed into electricity prices.
Council of Ministers approves Budgetary Planning Document
Policy
The government approves a 23.5 billion euro maneuver for 2027, with 14.4 billion linked to extra deficit for energy and defense. Families and welfare get the largest share at about 5 billion.
Bank of Italy warns deficit path could complicate EDP exit
Statement
The Bank of Italy says Italy's plan to run deficits above 3% of GDP in 2027 and 2028 could complicate the country's exit from the EU's excessive deficit procedure.
Court of Auditors flags debt path slipping
Statement
The Court of Auditors tells budget committees the debt outlook is in significant difficulty, with the reversal of the upward debt trend postponed from 2027 to 2028. It puts debt at 138.5% of GDP in 2027.
Giorgetti says EU rejection of flexibility would be a mistake
Statement
Economy Minister Giancarlo Giorgetti tells a parliamentary hearing the government wants to use the national escape clause to help families hit by economic shocks. If Europe says no, he says, that is the wrong choice.
Goldman Sachs warns deficit targets raise bond risk
Analysis
Goldman Sachs says Italy's raised deficit targets could heap pressure on Italian government bonds ahead of next year's general election. The extra €28 billion in borrowing over two years for defence and energy raises the 2027 deficit target to 3.4% of GDP.
EU Commission approves Italy's national escape clause
Policy
Commission gives positive assessment for Italy to invoke the escape clause for defence and energy. Dossier moves to the Council for final approval.
Dombrovskis says flexibility requests still under review
Statement
EU Commissioner for the Economy says the Commission will examine Italy's and Greece's requests for added flexibility 'in greater depth'.
Commission rejects Italy and Greece energy relief requests
Policy
The European Commission rejects demands from Italy and Greece for additional exemptions from EU spending rules to respond to the energy crisis. Economic Commissioner Valdis Dombrovskis says existing arrangements already take inflation into account.
Government approves budget plan with major deviation
Policy
2027 budget plan approved; growth raised to near 1%, defence-spending hikes scaled back.
Giorgetti sets deficit path
Statement
Economy minister projects a deficit below 3% of GDP in 2026, rising to 3.5% in 2027.
September financing requirement rises to €27 billion
Data release
Treasury reports €27 billion state-sector financing requirement, up from €25.49 billion a year earlier.
Meloni asks EU for fiscal flexibility
Statement
Meloni writes to von der Leyen requesting flexibility to support households and businesses hit by energy costs.
Budget bill approval postponed to late October
Policy
Cabinet approval of the 2027 budget bill was pushed back by a few days, probably to 28 October, as the government waited on the outcome of talks with Brussels over using budget flexibility for energy aid. The budget allocation is 23.4 billion euros, of which 14.4 billion comes from the authorised extra deficit.
New decree planned to cap gas prices
Policy
The agreement with the Commission aims to set a gas price cap of about 60 euros per megawatt-hour for at least one year, with Palazzo Chigi citing 59 euros. A new decree and another Council of Ministers step are still required; Il Sole 24 ORE reported the timing is unset but spoken of as year-end, so the discount would start in January 2027. The decree would replace the earlier ETS cost relief Brussels blocked, and officials estimate about 1.3 billion euros in help for firms from selling stored gas.
Giorgetti warns there is not enough to go round
Statement
The economy minister said the government is waiting on the European Union's leeway before finalising the budget, and warned that resources are tight, according to Il Sole 24 ORE.
Coalition summit leaves pensions and youth tax open
Policy
Meloni met Antonio Tajani, Matteo Salvini, Maurizio Lupi and Giorgetti at Palazzo Chigi without settling the budget. The League held firm on pensions, and a 5% flat tax for newly recruited young workers was among the measures on the table, Il Sole 24 ORE reported. The government aims to approve the bill in cabinet the following week, on a Tuesday or Wednesday.
September 2026
Inflation hits 4.2%
Data release
Istat confirms September headline inflation at 4.2%, up from 3.3% in August.
April 2026
April forecasts peg growth at 0.6%
Forecast
April's projections assume 0.6% GDP growth and a 2.9% deficit for 2026.
Scenarios
1
EU grants flexibility for energy relief
Possible
Resolves by End of 2026
Discussed by: Il Sole 24 ORE and the Meloni government's formal request; the Commission must respond before its budget assessment
Meloni's letter argues that inflation-driven tax revenue can't fund relief under current rules, and that price-indexed spending beyond government control (covering 20.4% of GDP directly, plus 12% more in 2027) should count in compliance checks. If the Commission accepts, Italy can run temporary support such as fuel discounts and scrapping the motor-vehicle tax by 2027 without triggering the excessive deficit procedure.
2
EU holds line, Italy tightens elsewhere
Possible
Resolves by End of 2026
Discussed by: Reuters reporting that Italy already scaled back planned defence increases to keep debt in check
The Commission sticks to the agreed net-expenditure path, so Italy funds relief by cutting elsewhere. Defence-spending hikes are already trimmed; further moves could include pension or tax measures. The government insists it stays within its corrective path, keeping the 2027 deficit near 3.5% of GDP as Giorgetti projected.
3
Deficit overshoots and borrowing costs climb
Possible
Resolves by Apr 30, 2027
Discussed by: Reuters flagged energy prices pushing up Italy's borrowing costs and the risk it overtakes Greece as the eurozone's most indebted state
Energy prices stay elevated and growth disappoints, so inflation lifts index-linked outlays faster than revenue rises. With debt already near 138% of GDP, yields climb and the deficit and debt beat the government's projections. The government's ~1% growth forecast, raised from 0.6%, relies on the first half's better-than-expected performance holding.
4
Council ratifies escape clause; flexibility request stalls
Deadline passed (Nov 8, 2026)
Discussed by: EU Commission officials and Il Sole 24 ORE reporting, plus Dombrovskis's public statements
The national escape clause is almost certainly approved by the Council within one month, giving Italy the €14bn-a-year defence and energy allowance. Meloni's separate request for inflation flexibility is the open question. The Commission has not ruled on it, which keeps the 2027 deficit pinned at 3.4% of GDP, the level fixed by the escape clause.
5
Commission grants bill-relief flexibility too
Deadline passed (Oct 16, 2026)
Discussed by: Meloni's October 1 letter; Commission officials quoted by EUinsider
The Commission could decide that Italy's inflation-driven indexation spending and windfall tax receipts justify extra leeway. That would give Rome room for temporary household and business support in the 2027 budget without the Council amending Italy's net-expenditure path. So far the Commission has only approved the defence and energy clause, not the relief request.
6
Energy stays high; deficit tops 3.4%
Possible
Resolves by Jan 31, 2027
Discussed by: Goldman Sachs warning to clients, reported by CNBC
Goldman Sachs says Italy's raised deficit targets carry bond risk, pointing to the extra €28bn in borrowing over two years for defence and energy. Strong energy prices and a slow economy could blow the 2027 target of 3.4%, pushing yields and debt service higher. October inflation of 4.1% already beats forecasts.
7
Italy fails to exit excessive deficit procedure
Possible
Resolves by Apr 30, 2027
Discussed by: Bank of Italy warning
The Bank of Italy says the plan to run deficits above 3% of GDP in 2027 and 2028 could complicate Italy's exit from the EU's excessive deficit procedure. Even if this year's deficit comes in below 3%, the Commission must be convinced the fiscal consolidation is lasting before approving the exit.
8
Commission proposes further energy measures after summit
Possible
Resolves by End of 2026
Discussed by: EU summit conclusions, October 15-16
The summit invited the Commission to examine and propose further measures to address soaring energy prices in the short term, taking into account member states' specific circumstances. If the Commission follows through, Italy could get additional relief beyond the national escape clause.
9
Gas price cap of about €60/MWh takes effect
Likely
Resolves by Jan 31, 2027
Discussed by: Italian government and European Commission, as reported by Il Sole 24 ORE
The understanding points to a cap on gas prices of around €60 per megawatt-hour for at least a year, with Palazzo Chigi citing €59. A new decree and another Council of Ministers step are needed before it applies.
Historical Context
3 moments from history that rhyme with this story — and how they unfolded.
1 of 3
Late 2011 to mid-2012
Italy's 2011-2012 sovereign debt crisis
Italian 10-year bond yields spiked toward 7% during the eurozone debt crisis, a level investors saw as unsustainable for a country with debt near 120% of GDP. Silvio Berlusconi's government fell in November 2011 and was replaced by Mario Monti's technocrat cabinet, which passed austerity including pension reform and a property tax.
Then
Yields eventually fell after the European Central Bank signaled it would do whatever it takes to save the euro in July 2012.
Now
Italy avoided a bailout but its debt stayed high and growth stagnated for years, shaping its reputation among northern European creditors.
Why this matters now
Shows how quickly borrowing costs move when a high-debt economy faces an external shock, and how austerity becomes politically explosive under market pressure.
2 of 3
October 1973 to 1974
1973 oil crisis
The Arab oil embargo after the Yom Kippur War roughly quadrupled crude prices. Western economies faced stagflation: high inflation alongside weak growth, squeezing household incomes and government budgets at the same time.
Then
Recessions across OECD countries and a policy dilemma between fighting inflation and supporting growth.
Now
Pushed energy-policy shifts and left a lasting imprint on how governments think about price shocks.
Why this matters now
The current episode mirrors an energy-price spike feeding inflation just as growth slows, constraining the fiscal room governments have to cushion the blow.
3 of 3
2010 to 2015
Greece's debt crisis (2010-2015)
Greece's public debt spiraled during the eurozone crisis, forcing multiple international bailouts tied to harsh austerity. Its debt-to-GDP ratio peaked at levels far above Italy's current projection.
Then
Years of recession, social unrest, and repeated bailout negotiations.
Now
Greece became the eurozone's most indebted country, a title Reuters reports Italy is expected to take this year.
Why this matters now
Italy is projected to surpass Greece as the currency bloc's highest-debt economy, a status with real political and market consequences.
