The climate-fiscal timebomb: Italy

Fiscal outlook

Italy recorded a 3.4% deficit and a debt-to-GDP ratio of 134.9% in 2024. It is on a corrective path under the EU’s excessive deficit procedure (launched in July 2024). On 21 January 2025, the Council of the European Union adopted a recommendation that Italy should put an end to the excessive deficit situation by 2026. Officials say Italy is close to exiting if targets hold.

Deficit measures the level of borrowing in a given year. Debt-to-GDP compares the total public debt to the size of the economy. Both are currently used to determine how much borrowing a member state is allowed to undertake. However, neither measure in itself determines a government’s capacity to sustain higher levels of public investment. Fiscal sustainability depends on growth, the multiplier effects of investment, interest rates, inflation, the structure of the economy and external risks such as climate change. NEF advocates moving away from strict numerical debt targets.

Rising climate costs

Climate shocks keep biting. Summer 2025 heatwaves fuelled high-impact wildfires — including Sardinia’s late-July blaze that forced beach evacuations by boat, adding pressure on civil protection, infrastructure, and health services. Moreover, EU Solidarity Fund money was granted following the 2023 flood disasters in Emilia-Romagna and Tuscany. At least 38,000 lives have been claimed by climate change in the last 30 years due to the increased prevalence of extreme weather events, such as severe heatwaves and heavy flooding. The impacts of extreme weather events have become painfully evident. In early 2026 cyclone Harry brought down a long section of hillside in Niscemi, Sicily, with 1,500 people needing to evacuate their homes while worries persist that it could swallow the town’s historic centre.

What NEF’s modelling shows

Organisation for Economic Co-operation and Development (OECD) projections show Italy’s GDP declining by 12% by 2050 and 17% by 2070 under current policies. Our modelling shows the following:

• Under current policies (BAU – business as usual), Italy’s debt is 99 pps higher than the climate-agnostic baseline in 2050 and 286 pps higher in 2070.

• With early EU mitigation and sufficient adaptation spending, debt is 55 pps higher in 2050 and 94 pps in 2070.

• Delayed EU investments and insufficient adaptation results in higher debt levels of 72 pps in 2050 and 129 pps in 2070.

• EU early action combined with global cooperation results in 1 pps higher debt levels than the climate-agnostic baseline in 2050 and 21 pps lower levels in 2070.

• Progressive taxation, such as a wealth tax combined with EU early action would increase debt by 11 pps in 2050 and by 7 pps in 2070 compared to the climate-agnostic baseline.

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