Italy’s Economic Shift: Deficit Reduction and Rising Confidence

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Published: August 26, 2025

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<a href=Giorgia Meloni, President of the Italian Council, in Rome.”>
Giorgia Meloni, President of the Italian Council, on July 15, 2025 in Rome (Italy). (Stefano Costantino TTL / Avalon / Maxppp)

Italy, historically burdened with substantial debt and frequently enough viewed as the Eurozone’s economic weak link, is exhibiting a remarkable financial turnaround. The country, once trailing substantially behind France in borrowing rates, is now experiencing a convergence, with the gap narrowing to just 10 basis points as of Tuesday, august 26.

A Dramatic Turnaround in Public Finances

This positive shift is largely attributed to Italy’s aggressive reduction of its deficit.From 8.6% in 2022, projections indicate a potential drop to 3.3% in 2025. Prime Minister Giorgia Meloni’s administration has implemented bold measures, including the discontinuation of the costly ‘citizenship income’ program and a subsidy for energy renovations.

Rather than introducing new spending initiatives,Meloni’s government has focused on fiscal prudence. This includes maintaining existing commitments, like fuel tax reductions, and capitalizing on favorable economic conditions. High inflation initially boosted tax revenues, while Italy has been a major beneficiary of the European union’s post-pandemic recovery fund, receiving approximately 200 billion euros.

Key Financial Indicators: A Comparative Glance

Indicator Italy (2022) Italy (2025 – Projected) France (2024)
Deficit (% of GDP) 8.6% 3.3% 5.5%
Debt (% of GDP) 145% 135% 113%
Job Growth – +500,000 +0.8%

Investors are responding positively, fueled by a growing

What are the primary long-term risks associated with Italy’s high debt-to-GDP ratio?

Italy’s Fiscal Reforms under Giorgia Meloni: Strengthening Public Finances As 2023

the Landscape of Italian Public Debt in 2023

Italy entered 2023 with one of the highest public debt-to-GDP ratios in the Eurozone, a longstanding challenge impacting its economic stability.Addressing this was a core promise of Giorgia Meloni’s government, elected in late 2022. Initial concerns regarding potential expansionary policies quickly gave way to a surprisingly pragmatic approach focused on fiscal consolidation and structural reforms. Key indicators at the start of the reform period included:

Debt-to-GDP Ratio: Approximately 144.4% (December 2022)

Budget Deficit: 5.3% of GDP (2022)

Economic Growth: Slowing, with projections of modest growth in 2023.

Key Fiscal Reforms Implemented (2023-2025)

The Meloni government’s fiscal strategy has centered around a multi-pronged approach, combining spending reviews, tax adjustments, and measures to boost revenue collection. Here’s a breakdown of the major reforms:

1. Spending Review and Efficiency Gains

A meaningful portion of the reforms focused on scrutinizing government spending. This wasn’t about drastic cuts across the board, but rather identifying areas of inefficiency and streamlining processes.

Public sector Efficiency: Measures to reduce bureaucratic overhead and improve the efficiency of public administration. This included digitalization initiatives and performance-based evaluations for public employees.

Social Program Rationalization: A review of existing social programs aimed at eliminating redundancies and ensuring benefits reach those most in need. This was a politically sensitive area, requiring careful balancing of social welfare concerns with fiscal responsibility.

Procurement Reforms: Changes to public procurement processes to increase clarity, competition, and value for money.

2. Tax Policy Adjustments

The government implemented several changes to the tax system, aiming to simplify it, reduce tax evasion, and incentivize economic activity.

Flat Tax Scheme: Expansion of the flat tax regime for self-employed individuals and small businesses, initially introduced in previous years. This aimed to encourage entrepreneurship and reduce the administrative burden of tax compliance.

Tax Evasion Crackdown: Increased efforts to combat tax evasion through enhanced enforcement measures, data analytics, and international cooperation. This included stricter penalties for tax fraud and improved monitoring of financial transactions.

Property Tax Reforms: Adjustments to the property tax system (IMU) to address inequities and generate additional revenue.

3. Revenue Enhancement Measures

Beyond tackling tax evasion, the government sought to increase revenue through other means.

Windfall Tax on Energy Companies: A temporary windfall tax on the remarkable profits of energy companies, capitalizing on the high energy prices following the geopolitical events in 2022.

Increased Excise Duties: Modest increases in excise duties on certain goods, such as tobacco and alcohol.

Digital Services Tax: Implementation of a digital services tax targeting the revenue of large technology companies operating in Italy.

Impact on Public Finances (2024-2025)

The reforms have begun to yield positive results, although the full impact will take time to materialize.

reduced Budget Deficit: The budget deficit decreased to 4.3% of GDP in 2024, and projections for 2025 indicate a further reduction to around 3.6%.

Stabilizing Debt-to-GDP Ratio: While still high, the debt-to-GDP ratio has shown signs of stabilization, with a slight decrease observed in 2024.

Improved Investor Confidence: The government’s commitment to fiscal discipline has helped to restore investor confidence in Italy’s economy, as reflected in lower bond yields.

Real-World Example: The streamlining of public procurement processes, particularly in infrastructure projects, led to a reported 15% reduction in project costs in several regions during 2024, freeing up resources for other priorities.

Challenges and Future Outlook

Despite the progress made, significant challenges remain.

Demographic trends: Italy’s aging population and declining birth rate pose a long-term threat to its fiscal sustainability,increasing pension and healthcare costs.

structural Issues: Deep-rooted structural issues, such as low productivity growth and regional disparities, continue to hinder economic performance.

EU Fiscal Rules: Compliance with the evolving EU fiscal rules, particularly the Stability and Growth Pact, will require ongoing efforts to maintain fiscal discipline.

Looking ahead, the Meloni government is expected to continue its focus on fiscal consolidation and structural reforms. Key priorities include:

  1. Pension Reform: Further reforms to the pension system to ensure its long-term sustainability.
  2. Labor Market Reforms: Measures to increase labor market flexibility and reduce unemployment.
  3. Investment in Innovation: Increased investment in research and development, and support for innovative businesses.

Benefits of Fiscal Consolidation for Italy