Italy's 2026 Budget Law: €23.5 Billion Manoeuvre Funded by Banks, Gaming and Spending Cuts

Italy's government unveiled a €23.5 billion budget manoeuvre for 2026, with the Italian Ministry of Economy and Finance detailing a package that draws on contributions from the banking and insurance sectors, gaming revenues and a ministerial spending review to finance tax relief for workers and families, a reinforced national health service and incentives for business investment.

The package is the centrepiece of Italy's fiscal strategy for the 2026–2028 period. It carries direct implications for Italy's standing under EU fiscal rules, for the trajectory of Italian government debt — including the BTP Italy 10Y — and for the broader credibility of Prime Minister Giorgia Meloni's consolidation path at a moment when markets are scrutinising Rome's public finances with renewed attention.

What happened

The Cabinet, chaired by Prime Minister Giorgia Meloni, approved the draft budget law on 17 October 2025, on a proposal by Economy Minister Giancarlo Giorgetti. The Italian Ministry of Economy and Finance simultaneously transmitted the Draft Budgetary Plan (DBP) for 2026 to the European Commission and to the Italian Parliament on 15 October 2025, in line with EU fiscal rules governing euro-area countries.

The law — formally enacted as Law No. 199 of 30 December 2025 — sets out an overall intervention of approximately €22 billion according to the Ministry's own summary, with the broader manoeuvre figure of €23.5 billion reflecting the full scope of measures as reported at the time of the DBP's transmission. The Ministry described the manoeuvre as one that "does not entail an increase in the deficit," framing it as part of "a responsible and sustainable management of public accounts" and confirming "the ongoing path of fiscal consolidation."

Where does the money come from?

The funding mix is a defining feature of the 2026 manoeuvre. According to reporting on the DBP transmitted to Brussels and Parliament, the main coverage sources include higher levies on banks and gaming revenues, alongside a new spending review applied to ministerial budgets.

On the banking side, the law confirms a financial-sector contribution involving both banks and insurance companies. For banks specifically, the measures include a two-percentage-point increase in IRAP (the regional business tax) for three years, with a €90,000 exemption applying in 2027 and 2028; restrictions on the deductibility of deferred tax assets (DTA); and the option to distribute reserves from windfall profits subject to payment of an extraordinary contribution.

The deductibility of losses and ACE surpluses is also reduced — from 43% to 35% in 2026 and from 54% to 42% in 2027. Interest-expense deductibility is set at 96% for 2026, rising gradually to 99% by 2029. The IRAP increase applies equally to insurance companies, with certain asset managers excluded.

Additional revenue measures include the doubling of financial transaction tax (Tobin tax) rates from 2026 and the introduction of a €2 levy on all shipments under €150 from non-EU countries, targeting the fast-growing cross-border e-commerce segment.

Main spending priorities

The largest single spending commitment in the 2026 law is in healthcare. On top of the €5 billion already allocated for 2026 in the previous budget cycle, the law provides an additional €2.4 billion for 2026 and €2.65 billion from 2027 onward. Part of these resources is earmarked for new hires and improved compensation for healthcare workers, as well as measures to reduce waiting lists.

Tax relief for workers and the middle class is the second major pillar. The second IRPEF bracket — covering incomes between €28,000 and €50,000 — is cut from 35% to 33%, though the reduction does not apply to incomes above €200,000. A favourable 5% tax regime applies to contract renewals on pay increases from 2024 for incomes up to €33,000, and the income threshold for access to the 15% flat tax on self-employed income is confirmed at €35,000 for employees or pensioners.

For families, the law revises ISEE calculation rules, raising the exclusion threshold for the primary residence from €52,500 to €91,500 (up to €120,000 in metropolitan cities). The "bonus mamme" monthly payment rises from €40 to €60 for working mothers with at least two children and income up to €40,000. A housing support fund for separated or divorced parents is established at €20 million from 2026, and the "Carta dedicata a te" — a €500 food-purchase contribution for families with ISEE not exceeding €15,000 — is refinanced for 2026–2027.

On pensions, the law freezes the three-month increase in retirement age from 2027 for workers in strenuous jobs; for other categories, the increase is limited to one month in 2027 and two months in 2028. A €20 monthly increase is granted to pensions of individuals in hardship, and APe Sociale is extended for specific cases.

• Healthcare: +€2.4 billion for 2026 (on top of €5 billion already allocated), rising to +€2.65 billion from 2027
• IRPEF cut: second bracket reduced from 35% to 33% for incomes €28,000–€50,000
• Bonus mamme: monthly payment raised from €40 to €60 for eligible working mothers
• Business investment: three-year hyper-depreciation for technological/digital assets (January 2026–September 2028); €1.3 billion fund for Industry 4.0 tax credits
• Pension hardship supplement: €20 per month increase
• Housing support fund: €20 million from 2026 for separated/divorced parents

Why it matters

The 2026 budget law is Italy's first major fiscal test under the reformed EU economic governance framework that entered into force in 2024. The Italian Ministry of Economy and Finance confirmed a 2026 deficit target of 2.8% of GDP — below the EU's 3% ceiling — and projected GDP growth of 0.7% for 2026 at the time of the DBP's submission. Italy's finances were described as benefiting from rising tax revenues, which provided room for the manoeuvre without a formal increase in the deficit.

The law's reliance on bank levies and gaming revenues as coverage sources has drawn attention, given the structural nature of some of the spending commitments — particularly in healthcare and tax relief — against the more cyclical or one-off character of certain revenue measures. The confirmation of the financial-sector contribution, rather than a new windfall tax, was presented by the government as a predictable and legally structured approach.

Italy's compliance with EU fiscal rules also carries political weight for Prime Minister Giorgia Meloni, whose government has staked its credibility on a path of gradual consolidation. The DBP was transmitted to Brussels on 15 October 2025 in the context of the EU's ongoing review of its budgetary oversight regulation, adding a layer of institutional scrutiny to the domestic legislative process.

What to watch next

Several dated milestones will determine how the 2026 budget law's measures translate into economic and market outcomes:

1. Parliamentary passage: Law No. 199 was enacted on 30 December 2025, completing the legislative cycle.
2. IRPEF and flat-tax changes: Take effect from the 2026 tax year, with the 15% flat-tax threshold confirmed at €35,000.
3. Hyper-depreciation for businesses: Applies to investments made between 1 January 2026 and 30 September 2028.
4. TFR and supplementary pensions: Automatic enrolment in supplementary pension schemes for new private-sector hires begins on 1 July 2026.
5. Plastic and sugar tax suspension: Extended until 31 December 2026.
6. EU fiscal oversight: Italy's deficit and debt trajectory under the reformed governance framework will be assessed in subsequent European Commission reviews, with the 2027 deficit target and debt ratio path — projected to rise to 138.5% of GDP in 2027 according to later official documents — representing the key variables for bond markets and the FTSE MIB (INDEX:FTSEMIB).