Secrétaire général

Italy: Stay on Course and Focus on the Future

 

Remarks by Angel Gurría, OECD Secretary-General, delivered at the launch of the OECD Economic Survey of Italy 2013


Rome, 2 May 2013

(As prepared for delivery)

 

Prime Minister Mario Monti, Minister Fabrizio Saccomanni, Ministers, Honourable Antonio Marzano, Ladies and Gentlemen,

Thank you for inviting me back to Italy. I was here in Rome last September with President Monti to present a report on “Italy: reviving growth and productivity”. At that time, I praised the courageous but essential decisions your country took to engage in ambitious reforms to address the crisis and create the necessary conditions to ensure economic recovery.

 

I am here today to say: stay on course and focus on the future (mantenere la barra diritta e puntare sul futuro!). Sure, the situation in Italy remains fragile: GDP is likely to fall 1.5 % this year – and we do not expect a rapid recovery – while unemployment is heading to over 12%.

 

But you are making visible progress, which is no small achievement: downside risks have been reduced, confidence is gradually improving, and the economy is projected to exit the recession next year. We believe that the plans outlined in the Stability Programme should allow the debt/GDP ratio to peak at around 134% of GDP, in 2014 or 2015, from 127% at the end of 2012, and then begin to decline.

 

That’s why, more than ever, it is crucial to maintain the reform momentum. Reforms are needed to deal with the legacies of the past, to put them behind us and to pave the way for a brighter future. First and foremost, Italy has a long standing issue of poor competitiveness which predates the crisis and needs to be addressed. Over the past 20 years, Italy’s real GDP growth per capita has been the weakest of all OECD countries. This reflects very low underlying productivity growth, which has added to fiscal difficulties and has resulted in stagnant (and recently declining) real income levels. This must change!

 

Stay the course: A three-pronged approach to reform.

The OECD Economic Survey of Italy 2013 that I am here to present and that will be the basis of the discussions during the seminar highlights three main recommendations:

  1. Sustain efforts to ensure fiscal consolidation;
  2. Advance the structural reform agenda: product market regulation, competition policy, civil justice, labour market policy;
  3. Strengthen policy implementation, legitimacy and transparency.

 

Let me elaborate on the three key recommendations from the Survey.

 

1 - Maintain progress towards fiscal sustainability

Italy has already achieved sizeable fiscal consolidation since the crisis of autumn 2011.  The current levels of interest rates on Italian public debt suggest that financial markets recognise this progress. Their relatively calm reaction to political uncertainty this year indicates a degree of confidence as well.

 

But we should be careful not to read too much into the numbers! Support from the European Central Bank, which is sometimes active and sometimes implicit, underpins part of this improvement, and confidence can evaporate without much warning. The remaining spread between Italian and German interest rates – which cannot really be justified purely by the difference in your levels of debt -- says something about perceptions of risk in investing in Italy.

 

The OECD supports the targets outlined in the recent Stability Programme and the measures needed to reach the objectives for this year and for 2014. They should lead to a long-term decline in Italy’s high level of public debt. But we must remember that, even so, the debt level will remain high for some time. That’s why it is so important to continue to pursue consolidation on a structural basis, even if takes longer to reach the headline target if the economy weakens. But let’s not forget that composition of consolidation must be improved to become more pro-growth and equity-friendly. Cutting taxes on labour is the thing to do if you really care about growth and jobs. Other tax cuts can wait. In all cases, tax cuts require spending cuts to be sustainable.

 

2 – Advance the structural reform agenda 

Italy’s fiscal policy strategy needs to be complemented with pro-growth reforms. As we have said to many countries, the potential payoffs of “going structural” are substantial. Our analysis suggests that the structural reforms adopted since late 2011 could raise Italy’s potential GDP by about 5½ % over the next 10 years. This means improved competitiveness and economic efficiency. But it also means better prospects for employment.

 

For instance, an important reform is the extended powers given to the Antitrust Authority to monitor the behaviour of public administrations at the national, regional and local levels who violate the principles of competition. Other achievements are the labour market and social protection reforms, which introduced more flexibility where needed, e.g. in dismissal proceedings and first-time contracts, and measures to reduce over-reliance on atypical contracts. It is important to complement this effort with training and job-search support aligned with the social safety net. Achieving this coordination will be one of the most difficult tasks of the next few years.

 

While some reforms don’t put a burden on the budget, such as those related to regulation, for example, others draw more heavily on budgetary resources, such as widening the social safety net, maintaining the health system, reducing the tax burden on labour.

 

How can we finance reforms in these areas? As mentioned Italy must stay the course in fiscal consolidation. Taxes should be reduced where they can most help growth and jobs. The reviews of policy and spending can point to areas where savings can be made and resources can be allocated to other ends. In the short term, you can reduce many of the specific subsidies or tax allowances that go to firms, redirecting that revenue to prioritised expenditure. Over time, it will be possible to gradually reduce the overall level of taxation.

 

Just as for fiscal consolidation, structural reforms also require effective implementation and a commitment to give them time to work. This means avoiding backsliding under pressure from interest groups and avoiding piecemeal changes. Policy implementation leads me into the third point I wanted to touch on.

 

3 - Address implementation gap and restoring trust

The Economic Survey devotes a chapter to the various dimensions of policy implementation: the design and adoption of legislation, and the role of governmental bodies in endorsing policy and in making it effective, transparent and accountable. Transparency and accountability are also essential for promoting efficiency and god governance, helping to fight corruption and minimising vulnerability to organised crime.

 

The OECD strongly supports the wider use of CONSIP, the public procurement body, to reduce costs and reduce corruption. And we believe that improving the efficiency of civil justice, like the streamlining process currently under way in your country, and through attention to sometimes perverse incentives, will both save resources and support a more efficient business sector.

 

Focus on the future, but be sensitive to the present!

Ladies and Gentlemen: Focus on the future but be sensitive to the present! Good adjustment programmes are the ones that can be adjusted! As I said before, and I will say it again, Italy needs to simultaneously pursue fiscal consolidation and structural reforms to free it from the vicious cycle of low growth, high unemployment, high debt, and distrust in government and institutions. But we cannot forget that reforms are about improving welfare and the well-being of people.

 

The recession has impacted all of us, but in particular, the most vulnerable and our future – our youth. As in many other OECD countries, inequality is high in Italy and has been exacerbated by the tough jobs climate since the downturn. The unemployment rate in Italy has reached almost 12% – a hard number to cope with in and of itself – but youth unemployment is three times as high. In fact, it has already reached almost 38%.

 

Italy’s tomorrow depends on the actions it takes today. Therefore, it is imperative to institute policies to protect those who cannot protect themselves and ensure intergenerational prosperity. 

 

First, the burden of the adjustment should be shared equitably. It means favouring measures that are the least harmful to growth and social cohesion, and pursuing policy actions with least short-term and social costs. For instance, in the short term, it might be wise under certain conditions to delay the implementation of such labour market provisions as those on temporary contracts until economic conditions improve.

 

Equitable also means paying your fair share of taxes. This requires continued action to improve tax compliance by all taxpayers, whether it is by large businesses artificially shifting taxable profits to low-tax jurisdictions or by rich individuals under declaring their income.

 

Measures, like redditometro (“income meter”), which helps to pin down individual income by tracking the purchase of consumer goods and comparing the total to declared income render the administrative costs associated with tax evasion high and put an unfair burden on legitimate – meaning honest and tax paying – individuals and businesses. When tax evasion is widespread, the trade-off between softening anti-evasion measures (which would lower the administrative costs) and high administrative costs is merited. 

 

Conclusion

So, what are the next steps? There is more than one way forward and choices can be made on the exact design of future policies. Unfortunately, there are no easy answers. The burden lies heavily on policy makers -- responsible policy makers – to convince the public of the need for action and to bring about consensus on what is needed. Restoring Trust is part of the story. The OECD stands ready to support this process.


 

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