Italy’s coalition government led by Prime Minister Giorgia Meloni has approved a budget for the coming year that meets European Union fiscal requirements, amid growing concerns about financial instability linked to France’s escalating debt challenges.

The budget, endorsed by Meloni’s three-party coalition on Tuesday, allocates €26 billion for a mix of tax cuts and increased spending. To partially finance the package, the government plans to impose new levies totaling €5.7 billion on the banking, insurance, and energy sectors. The measures reflect the coalition’s ongoing focus on supporting families, boosting birth rates, preserving purchasing power, and incentivizing employment and business activity.

Meloni emphasized the government’s commitment to concentrate limited resources on long-term priorities, stating that these themes have guided policies over the past four years. During that period, her administration has been credited with maintaining fiscal discipline, reducing Italy’s budget deficit, and earning favorable assessments from credit rating agencies. The government forecasts this year’s deficit to come in at 2.9 percent of GDP, just below the EU’s 3 percent threshold.

Despite these efforts, Italy faces rising borrowing costs amid broader European market tensions. Since late February, the yield on Italy’s 10-year government bonds has increased from under 3.3 percent to around 4.5 percent. The country’s borrowing spread over German bonds reached nearly 1.3 percentage points this month, its highest level in over a year, as investors remain cautious due to fears of contagion from France’s worsening debt conditions. Italy’s borrowing costs, however, still remain below France’s, which recently hit their highest point in 25 years.

For 2025, Italy anticipates its budget deficit will climb to 3.4 percent of GDP, reflecting increased spending allowed under the EU’s national escape clause. This temporary exemption permits member states to surpass the deficit limit if additional expenditures are directed toward defense and energy security—areas of heightened concern amid geopolitical uncertainties.

Negotiating the budget proved complex as coalition partners worked to balance the need for economic relief for citizens grappling with sluggish growth and rising living costs, against the imperative to maintain fiscal prudence to reassure international investors. The country has recently experienced social unrest, including strikes by truck drivers and violent riots in Milan, driven by public frustration over economic conditions.

While the cabinet has given initial approval to the budget, further debate is expected in Parliament, where the coalition must secure final passage. The process will likely test the unity of Meloni’s alliance as Italy prepares for national elections next year, with the government seeking a renewed mandate against a backdrop of economic and political challenges.