Italy to raise 2026 growth forecast, cut defense plans - report

Italy is planning to boost its 2026 economic growth forecast and revise its defense spending strategy, according to a Reuters report on Friday. The revised forecasts will guide the government's 2027 budget, set to be presented by Prime Minister Giorgia Meloni later this month ahead of a national election. Italy experienced better-than-anticipated growth in the first half of 2026, prompting the government to raise its growth forecast for 2026 to nearly 1% from 0.6% previously.

Growth is expected to slow next year, remaining close to the 0.6% forecast. The government anticipates a budget deficit of 2.9% of GDP in 2026, down from 3.1% in 2025 and in line with its target. This would be the first time Italy's deficit falls below the EU's 3% threshold since 2019. However, the deficit is expected to rise from 2027 as Italy utilizes an EU mechanism to temporarily increase borrowing for defense spending and energy cost mitigation measures linked to the Iran conflict.

Italy had planned to use the mechanism for an additional budget room of 1.5% of GDP, or around 36 billion euros through 2028. Now, the government plans to scale back the defense component, using only 0.6% of GDP for energy cost measures, while cutting defense spending to 0.6% of GDP from the previous plan of 0.9%. The extra defense spending is expected to be around 14 billion euros annually in 2027 and 2028.

The move comes as Italy grapples with high debt, projected to reach nearly 139% of GDP in 2026, its third consecutive annual peak, and faces political pressure to control spending. The defense spending increase has also caused internal division within Meloni's coalition. Economy Minister Giancarlo Giorgetti is negotiating with the European Commission to ensure the additional borrowing does not jeopardize Italy's exit from the EU's excessive deficit procedure in mid-2027.

Meloni has also requested greater EU flexibility in budget rules to manage rising energy-influenced inflation, which accelerated to 4.1% in September from 3.2% in August.