Italy's Cabinet Approves 2026-2028 Budget Draft Featuring Tax Cuts and Financial Sector Contributions

The Italian Cabinet officially approved the draft 2026-2028 budget on Tuesday, October 14, 2025, outlining a fiscal plan that includes significant tax cuts, contributions from the financial sector, and a targeted reduction in the national deficit. The draft will now be submitted to the European Commission for its assessment before proceeding to the Italian Parliament for final approval.

Deficit Reduction and Fiscal Targets

A central aim of the newly approved budget is to reduce Italy's deficit-to-GDP ratio. The government projects a deficit of 2.8% in 2026, a decrease from the estimated 3% for 2025. This target is part of a broader strategy to bring the deficit down further to 2.6% in 2027 and 2.3% in 2028. Economy Minister Giancarlo Giorgetti emphasized the government's 'firm and prudent approach' to maintaining public finance stability in compliance with new European rules. This fiscal consolidation is intended to help Italy exit the European Union's excessive deficit procedure.

Tax Cuts and Economic Stimulus

The budget includes several measures designed to alleviate the tax burden and stimulate economic activity. A key component is a reduction in personal income tax, known as IRPEF, which is expected to cost 9 billion euros between 2026 and 2028. Specifically, the tax rate for the second of three income brackets will be lowered from 35% to 33%. This adjustment primarily affects incomes between 28,000 and 50,000 euros, with some indications it could extend to 60,000 euros.

Additionally, the budget allocates 2 billion euros for 2026 to compensate workers for the erosion of their wages due to inflation experienced in 2022-2023. To boost corporate investments, 4 billion euros have been earmarked for tax incentives. The plan also features a large-scale tax amnesty, allowing individuals who have not settled their tax bills up to 2023 to resolve disputes with the state revenue agency without penalties or interest.

Contributions from Banks and Insurers

To help finance these measures, the Italian government will seek contributions from the country's financial sector. Political sources indicate that banks and insurance companies are expected to provide between 4.5 and 5 billion euros over several years. This funding will largely come through the extension of a multi-year freeze on deferred tax assets (DTAs), which are tax credits that financial institutions can utilize to enhance their profits. The Italian Banking Association (ABI) has expressed its readiness to support public finances through this measure.

Next Steps

With the Cabinet's approval, the draft budget will now undergo scrutiny by the European Commission. Following this, the full budget document is scheduled to be presented to the Italian Parliament by October 20, with the aim of securing final parliamentary approval by the end of the year. The government's overall strategy for the next three years involves funding tax cuts and other expansionary measures, averaging approximately 18 billion euros per year, through a combination of spending containment and increased revenues from various sources.