Italy could face disciplinary action over its failure to respect European Union spending rules.
The European Commission found that Italy’s public debt stood at more than 130% of GDP in 2018 – far above the 60% limit which EU rules require.
It warned that a “snowball effect” was likely to see the situation worsen in 2019 and 2020, as it recommended legal action.
But Italy’s populist leaders remained defiant following the warning.
EU commissioner for the euro and social dialogue, Valdis Dombrovskis, said the Italian economy showed “the damage recent policy choices are doing.”
He called on the country’s leaders to take action to reduce debt, saying there needed to be a “renewed reform effort, not spending more where there is no fiscal space to do so”.
Without taking action, the disciplinary procedure – which has not yet been opened – could ultimately result in an unprecedented fine of more than €3bn (£2.6bn).
But Italy’s government showed little immediate interest in a policy change.
“I’m sure that in Brussels they will respect our will,” said Deputy Prime Minister Matteo Salvini. “The only way to cut the debt created in the past is to cut taxes.”
“Cuts, sanctions and austerity have only produced more debt, poverty, precariousness and unemployment. We need to do the opposite,” he added.
Fellow Deputy Prime Minister Luigi Di Maio said politicians would “go to Europe and discuss [the issue] responsibly”.
But, he added: “It’s tough, when you see that every day they find another reason to say bad things about Italy and this government.”
The warning on Wednesday is the latest to be made by the European Commission over Italy’s spending.
The country narrowly averted the same procedure at the last minute in December by lowering an initial target for the budget deficit this year.