Italy deficit targets raised to 3.4% as Goldman warns of bond risk

Italy just tore up its budget math. On October 2, Giorgia Meloni's government approved €28 billion — about $31 billion — in additional borrowing to fund defense and energy spending through 2028, a scaled-back version of an even bigger plan floated earlier.

The new targets: a 3.4% deficit in 2027 and 3.2% in 2028. April's projections — 2.8% and 2.5% — are now dead letters.

Goldman Sachs is not mincing words. Senior European economist Filippo Taddei called the revision a "significant upward surprise" in a note published Thursday. His argument is simple: wider deficits plus rising yields will push Rome's public-debt ratio toward 137% of GDP by 2028, the worst on the continent by then. The money is split evenly — defense and energy each absorb roughly 0.3% of GDP a year. And the new targets overshoot even Goldman's own forecasts.

Here is the number that should make traders sit up. If 10-year yields settle structurally above 4%, Taddei says, Italy's debt ratio climbs indefinitely. BTPs are already at 4.55%.

The politics add pressure from another direction. Italians must go back to the polls by December 22, 2027 at the latest, and parliament voted Thursday to replace the mixed electoral model with one tilted further toward proportional representation. Her coalition claims the change will produce steadier governments instead of messy post-election bargaining; opposition parties call it an engineered bid to extend her grip on power. Either way, Taddei expects fiscal risk premia to rise ahead of the vote. A close race would leave little room for consolidation, since coalition-building tends to mean more spending, not less.

Rome does have one defense. The extra spending falls under Brussels' National Escape Clause, a provision that lets member states stretch budget rules for defense and energy outlays driven by the fallout from the Ukraine war and fighting in the Middle East. Economy Minister Giorgetti's line is that the headline numbers are "above 3% only before adjustment" — once the approved defense and energy lines are stripped out, the underlying position still sits beneath the 3% EU ceiling.

Why it matters

This is a U-turn after four straight years of fiscal repair. Meloni's administration earned plaudits for dragging the deficit down to 3.1% of GDP in 2025, with a 2026 target of 2.9% that would clear the EU's 3% ceiling. If Taddei is right, Italy is about to overtake Greece as the eurozone's most indebted nation. Debt nearing 139% of GDP, September inflation at 4.1%, barely 1% growth: a brutal mix of rising nominal debt service, weakening real output, and an election calendar that punishes austerity.

Context is everything. France's 10-year yield just touched multiyear highs and sat at 4.85% on Friday — only 30 basis points above Italy's 4.55%. The France fiscal meltdown has already put European sovereign debt back in the spotlight, and yields across the continent are surging as the Fed keeps hiking — December hike odds are running near 68-70%. Italy is borrowing more into a market that is already charging more. The Italy-Germany 10-year spread stood at about 108 basis points on Friday; the 2-year spread has nearly doubled to 55 basis points, its biggest one-day jump since 2020.