Italy’s 2025 deficit seen below 3% of GDP, a year ahead of schedule

Italy's tax take is rising faster than expected thanks to job growth and inflation, putting the budget deficit on track to dip below the European Union ceiling of 3% of gross domestic product in 2025, a year ahead of schedule.

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Tax revenues rose by more than $18.76 billion euros ($18.76 billion) between January and July, 5% higher than in the same period last year and outpacing the expectations of the Italian Treasury, which in April forecast a 0.8% increase for the full year.

The government had estimated a deficit of 3.3% of GDP in 2025, but the extra taxes mean the fiscal gap will probably be significantly lower.

Prime Minister Giorgia Meloni and her right-wing allies are claiming credit for the stronger numbers, yet economists say the upswing has been caused by phenomena not necessarily tied to the government, which took office in late 2022.

ARITHMETIC OF ITALY'S TAX TAKE: Tax evasion reforms introduced over the years are bearing fruit, analysts say, although much of the heavy lifting is down to inflation-driven fiscal drag and the creation of some 2 million new jobs over the past four years that have boosted tax receipts.

“Job growth boosts both tax revenue and GDP, but tax revenues grow faster than GDP since employment is taxed much more heavily than other kinds of income,” said Marco Leonardi, economics professor at Milan's Statale University. Meloni frequently points to the job growth as an achievement of her government, but never mentions the fiscal drag - a simple economic phenomenon where inflation and nominal pay growth raise the proportion of taxes paid on income.