OECD Economic Surveys: Italy 2026

The economy’s growth was moderate in 2025, as global trade restrictions and uncertain external demand weighed on activity. After declining with the retreat in energy prices in 2024, inflation is picking up again and will rise further with the disruption to global energy supplies, setting back the recovery from the earlier loss in real incomes. Growth is projected to slow as the renewed surge in energy prices weighs on demand and real incomes are dragged by the surge in global energy prices, before recovering slightly as a stabilising international situation supports exports, household consumption and private investment.

Rising investment, much driven by tax credits and the National Recovery and Resilience Plan (NRRP), has buttressed activity. Industrial production stabilised in mid-2025 after over two years of broad-based falls. Global trade policy restrictions buffeted trade flows and weighed on confidence in 2025, while households sustained solid savings rates above pre-pandemic levels.

Sustained employment growth has attracted an historically high share of adults into the labour force and boosted real incomes. Much of this growth has been in permanent and full-time jobs, although many have been in lower-skilled and lower-wage jobs in tourism and consumer-focused services and in construction. Inflation moderated significantly since the peak in 2022 and underlying inflation has been around 2%, somewhat higher than in the decade prior to the pandemic, but renewed disruptions to energy supply are lifting inflation rates again.

The global surge in energy prices in 2026 is expected to weigh on growth over the next two years. Weaker growth in household consumption, production and investment is expected to slow GDP growth to GDP growth 0.4% in 2026, a similar drag to growth as other OECD countries. Output growth is expected to pick up to 0.6% in 2027 with increasing capital formation and stabilising external conditions supports households’ spending (Table 1). Growth prospects into the medium term can be lifted by implementing well-calibrated reforms that raise investment and employment, particularly by further reducing entry barriers to business services and improving young people’s transition into work, alongside maintaining higher public investment and improved fiscal credibility.

Risks to the outlook are significant and tilted somewhat to the downside. Geopolitical tensions and energy market disruption remaining heightened, intensification of global trade tensions, weaker external demand or deeper shifts in activity due to structural changes or greater competition from emerging economies would weigh on production, exports and the broader economy. Financial risks in global markets and the non-bank financial sector could weaken external demand, raise the government’s interest costs and limit firms’ access to finance.

The budget deficit fell towards the 3% of GDP threshold in 2025, after the primary balance returned to surplus in 2024, but public debt is high and will rise in the coming years. Italy’s Medium-Term Fiscal-Structural Plan (MTFSP) provides for steady fiscal consolidation, putting the debt ratio on a more sustainable path, but requires restraining expenditure growth. Pensions’ large share of spending and growing pressures from ageing, climate change and defence will require offsetting savings (Figure 2). A longer-term strategy is required that intensifies efforts to curb age-related spending, notably pension costs, raises spending efficiency and makes the tax system more effective and growth-friendly.

The budget deficit fell from 3.4% of GDP in 2024 to slightly above 3% of GDP in 2025. Much of the reduction was due to the further unwinding of costly building tax credits introduced over 2022-2024, while nominal income growth supported revenues. The budget returned to a primary surplus in 2024, interest spreads have narrowed and agencies have upgraded their credit ratings.

Public debt exceeds 137% of GDP and would continue to rise under current tax and spending settings. This debt ratio creates large ongoing re-financing needs and interest costs, while increasing the economy’s vulnerability to shocks. With rising spending pressures, significant fiscal adjustment and reforms to spending and taxation will be needed (Figure 2, Panel B).

The government’s MTFSP sets out a steady fiscal consolidation to 2031. This implies primary spending declining relative to the size of the economy each year to 2031, leading to a significant primary surplus and putting the debt ratio on a sustained declining path into the medium term. This will have a modest drag on demand in the coming years. Continuing and building on the reform momentum would help to raise growth and improve fiscal sustainability amidst these pressures.

Containing overall spending is challenging amidst growing pressures from health care, climate and defence costs, while skills and infrastructure needs remain significant. Pensions and other ageing costs are among the highest across OECD countries and will continue to rise until the mid-2030s before eventually falling as the transition to the reformed pension system advances. Pursuing a longer-term strategy for spending and tax policy to manage these pressures would improve fiscal sustainability.

Spending should be prioritised and made more efficient. Maintaining current rules that link retirement ages and accrual rates to changes in life expectancy and avoiding new incentives to retire early remain important for the pension system’s sustainability. Mechanisms should be developed within constitutional limits to reduce the cost of first-pillar pensions, for example by reducing the value of high pensions that do not reflect recipients’ contributions. Spending reviews can help contain and improve the effectiveness of other spending. Their role is growing in Italy and their scope can be further expanded and integrated into budget allocations.

The public administration’s performance and management arrangements are improving, helped by NRRP reforms, but there remains great scope for further progress. Ongoing reforms to recruitment, compensation, performance management and promotion are helping to rejuvenate the public workforce. Given the imminent waves of retirements, there is an opportunity to improve work practices and encourage stronger performance, while reducing costs. Addressing procedural and practical barriers to employees’ mobility across all levels of the public sector would help fill skill gaps, and support employees’ skills and service delivery.

Large shortfalls persist in revenue collections, despite progress. Planned reforms to simplify VAT legislation and expand digital tools can help address the ongoing collection gap, as would curtailing exemptions and aligning reduced VAT rates with the standard rate. A large collection gap remains among the many self-employed, and the simplified tax regime can encourage self-employment. Tightening eligibility for the simplified regime and reducing administrative burdens in the standard regime would reduce the attractiveness of self-employment and the simplified regime. Encouraging digital payments instead of cash would help curb undeclared activity and support collections.

Reforming the tax policy mix would encourage productive investment and employment, while sustaining revenues. Taxes on labour are high, particularly social security contributions, and are likely to disincentivise formal work, especially at low wage rates. Shifting the tax burden from labour taxes to property and related taxes, while improving compliance, would help to rebalance the tax system. Expanding efforts to ensure that the cadastre is complete and reflects up-to-date values would improve the equity and efficiency of the property tax system. Inheritance and gift taxation are limited by generous exemptions and allowances. There is also scope to broaden the base for capital taxes and corporate income taxes, while phasing out the taxes on production.

As its population ages, Italy is facing a shortage of workers. Low wages and the dualism of the labour market push many young individuals to stay out of work and training (Figure 3) or to emigrate. Supporting school-to-work transitions, boosting returns to higher education, and revising labour market regulations could improve young Italians’ labour market prospects.

Despite important progress and significant policy interventions, the share of young people not in training or employment remains among the highest across OECD countries. School dropout rates have declined but remain high, and school-to-work transitions difficult. Stronger formal monitoring systems to identify and support youth with weak attendance records, behaviour and achievement would help further reduce school dropout rates. Skill mismatches are high and many young individuals leave school without adequate work experience and the practical skills that employers seek. Extending the use of high-quality internships within study programmes could reduce the skill mismatch between labour demand and supply, improve school-to-work transitions, and help students make informed decisions about their choice of studies at university.

Returns to tertiary education are low, and the share of graduates is lower than in most of Europe. Continuing to expand the network of ITS technical tertiary schools, especially in the South, would help offer a work-oriented alternative for secondary school graduates. Better resourcing public universities and strengthening their incentives to ensure graduates are ready for the labour market would help.

Relatively low wages, the high incidence of temporary contracts and the expectation of slow wage growth and career progression push many young Italians to emigrate or stay out of the workforce. High non-wage labour costs and uncertainty about the costs of dismissing workers make it risky for firms to hire workers, especially those new to the labour market. A series of reforms eased dismissal protections of permanent workers, and temporary incentives for permanent hiring put in place, yet employment protection in Italy remains strict, and the share of temporary contracts relatively high, while many young workers have temporary job contracts and are less likely to transition to permanent contracts than in many other EU and OECD countries. Labour market reforms can help retain and attract talent and improve living standards. Reducing the tax and social contribution wedge on low-income workers would support employment and net income for young workers. Restricting the use of temporary contracts and reforming employment protection legislation to reduce the uncertainty about dismissal costs, within the constitutional constraints, would help reduce the duality of the labour market and increase the use of permanent job contracts.

The renewed disruption to global energy markets in early 2026 underscores the central role of reliable and low-cost energy supply for Italian firms’ competitiveness and households’ well-being (Figure 4). With the large share of energy sourced from imported fossil fuels, susceptible to global supply disruptions, and the need to meet emissions reduction goals, large shifts are needed in Italy’s energy mix. Electrification and the shift from natural gas to renewables to generate electricity, making the most of Italy’s natural endowment, will be key to reducing energy costs, fossil fuel emissions and reliance on fossil fuel imports, but require pursuing policy action, including to accelerate the development of generation, transmission and storage infrastructure.

Diversifying energy sources and shifting away from imported fossil fuels is central to reducing energy costs and achieving national emission reduction goals. Since 2022 Italy has achieved one of the largest shifts in its supply of natural gas, mobilising new sources and supply routes to replace Russian-sourced gas. But this has raised already-high energy costs, due to the large role of gas in Italy’s energy consumption more broadly, and increased exposure to global LNG markets, weighing on industrial production and export competitiveness. The government is working with its neighbours including in northern Africa to develop new energy production and supply infrastructure, although resources are constrained and approvals to date have largely been for natural gas infrastructure rather than renewables.

Despite strong natural potential for renewables and strengthened policy efforts, new generation capacity and the associated grid infrastructure lag national objectives. Lengthy permitting processes, fragmented by Italy’s multi-layered governance structure, create uncertainty for investors and delay projects. Approvals need to pass through multiple central government and subnational government agencies, with rules and processes in conflict at times. Better aligning the rules and spatial plans of subnational governments with the national energy development plans and strategies would help.

Electricity transmission and distribution need substantial investment. Renewable generation requires restructuring the transmission system given the dispersed nature of production and its distance from centres of demand. The existing infrastructure needs reinforcing as it ages and climate change brings more challenging weather conditions. Requests by renewable developers for connections have surged and need to be reprioritised based on projects’ maturity and contribution to the national energy plan. A more anticipatory approach to preparing and authorising transmission infrastructure development can help accelerate construction as needs develop. Increasing cross-border capacity can improve the system’s resilience and reduce generation and storage investment needs. Despite these efforts, shocks to the energy system may still occur, requiring effective national contingency plans.

Electrifying fossil fuel uses in buildings, transport and industry is lagging the pace needed to meet emission reduction goals and to lower energy costs. The new Emission Trading System will help reduce the gap between the effective tax rate on natural gas and electricity and generate funds to support energy renovations, especially for capital-constrained households and businesses. Sector-specific measures can help, such as establishing national bodies to support public authorities at all levels to renovate public buildings and reducing the regulatory complexity facing investors developing vehicle charging networks.

Recent reforms aim to make energy pricing more dynamic and market-based, but risks remain. Public interventions in recent years have cushioned households and firms from price shocks, though some measures have been costly and inefficient. As markets deepen, reducing the use of publicly-backed instruments can limit risks for public finances and consumers. Strengthening regulatory oversight of energy markets will support transparency and reduce risks of market manipulation. Avoiding broad-based energy price subsidies and support, including generous tax credits, while providing targeted support measures for the most vulnerable, would improve spending efficiency.

Italy has a large number of smaller firms, which contribute to diversified production and exports but tend to have lower productivity and investment. Despite some emerging positive trends, larger firms, which generally have high productivity, still make up a relatively small share of the economy. Making it easier for successful small firms to scale up would help accelerate labour productivity growth. Reforms are needed to streamline regulation, accelerate innovation and facilitate the deepening of capital markets.

A more dynamic business environment is key to support productivity growth, competitiveness and living standards. Labour productivity growth has been sluggish since the mid-1990s, despite recent signs of improvement. Italian firms compare well with others in their size class in peer countries, but the relatively low share of larger firms, with higher productivity, weighs on the economy’s overall performance (Figure 5). Firms face challenges to scale up or merge. Further reducing barriers to business creation, especially in highly regulated professions and in retail, and to businesses consolidating and exiting, can help achieve this. Despite significant progress with recent reforms to the business insolvency, public support and justice systems, high regulatory burdens and compliance costs, including in the tax system, still weigh on productivity. Smaller and growing businesses are particularly affected as they reach size thresholds.

Shallow capital markets limit non-bank financing and investment opportunities, especially for enterprises with high investment needs and low collateral, like innovative start-ups. The recent introduction of tax deductions on capital gains is expected to boost demand for venture capital investments.

Corporate R&D and innovation are low, even in high productivity regions. Low innovation and patent activity are at odds with excellence in basic research. Further increasing public support to R&D and the share of it delivered through direct support and grants to SMEs and innovative industry-academia clusters can improve knowledge transmission and help attract private investment.

A large array of temporary tax measures has been deployed to support innovation and investment. Tax cuts and other support measures are often temporary and overlapping, making it hard for smaller firms to benefit. Sustaining current efforts to streamline support into a relatively small number of stable, targeted subsidies would help improve their effectiveness and reduce compliance and administration costs. Such streamlining should be based on a proper assessment of the measures’ cost effectiveness to identify those to extend.

The consolidation of small family-owned firms into larger, professionally managed firms can improve managerial practices, promoting productivity growth and innovation. While inheritance tax exemptions and allowances encourage heirs to retain control of family business, this can be at the cost of the quality of their management or prevent bringing in outside capital to grow the firms into larger, more profitable and productive entities.