Foundations for Growth and Competitiveness 2026

Italy

Italy's economic performance has improved over the past decade following the crises of the early 2010s, and output per capita has been expanding. Rising employment has led this improvement. Unemployment has fallen to historic lows and more women and older adults have been drawn into work. Investment has risen. While labour productivity improved in the late 2010s, it has since weakened, as strong employment growth generated by expanding employment-intensive service sectors has outpaced the overall growth in output. The ongoing National Recovery and Resilience Plan is propelling an ambitious programme of structural reforms and public investment in support of higher productivity.

Raising economic growth rates will require navigating the headwinds of the rapidly ageing population, amplified by lower labour force participation by women and the young than in most peer countries, despite recent improvements, as well as significant skills gaps. Bolstering private sector investment, especially in research and innovation, would lift productivity growth. Ensuring that fiscal policy makes sustained, credible inroads into the high public debt, consistent with the medium-term structural-fiscal plan, would support reform and growth more broadly into the long term, as ongoing fiscal consolidation and the weight of pension and other spending needs limit fiscal space for investment or to lighten tax burdens.

Economic performance

Gaps to the average of the upper half of the OECD countries

Source: Panel A: OECD, Economic Outlook database; Panel B: OECD, Labour Force Statistics database; Panel C: OECD, Economic Outlook and Productivity databases; Panel D: OECD, Economic Outlook and Annual National accounts, GFCF by assets databases.

Selected policy gaps

Source: OECD calculations based on the Foundations for Growth and Competitiveness database.

Macroeconomic stability: Pursue the consolidation of public finances to support low and stable financing costs

Italy’s public debt ratio, approaching 150% of GDP (137% of GDP under Maastricht criteria), is among the highest across OECD countries. It has raised interest rate spreads and borrowing costs for investors, pressured the financial system and limited fiscal space to maintain and invest in human capital and physical infrastructure. In recent years, generous tax credits worsened public finances, although the public debt ratio is expected to start to recede as their effects unwind and the medium-term fiscal-structural plan is providing a path to reduce the budget deficit, contributing to lower interest rate spreads and improved credit ratings. In coming years, spending pressures from defence, pensions and climate change will rise, while public investment needs will remain significant, challenging this fiscal consolidation.

Recommendations

✓ Consistent with the medium-term fiscal framework, reduce spending relative to GDP and use any windfall revenues to reduce the budget deficit and meet the medium-term targets.

✓ Further develop the role of spending reviews, making their scope and savings targets more ambitious.

✓ Bolster the revenue base by continuing to tackle tax evasion, by reducing tax expenditures, and by improving the effectiveness of the tax administration, including by furthering the use of digital payments and by updating the property tax base calculations.

Labour market: Raise participation, especially of women and youth

Despite recent growth in employment and falls in unemployment rates, even amidst slowing economic growth, employment rates remain lower than in most OECD countries, mainly reflecting low participation among women and young people. This is partly explained by weaknesses in family policies and, despite recent progress, in access to training elements of active labour market policies, notwithstanding ongoing reforms to encourage gender parity, and weak financial incentives due to the high tax and social contribution rates for social benefit recipients to take up employment. One-sixth of the workforce is subject to non-compete clauses, reducing the workforce’s dynamism, notably in professions where access to trade secrets or firms’ tacit knowledge is highly unlikely.

Recommendations

✓ Expand the coverage of early childhood education and improve the take-up of paternity leave under the “father quota” bonus within the shared parental leave entitlement through more effective incentives, including higher salary replacement rates and better informing all workers of the bonuses.

✓ Review and reform various tax allowances and benefits to ensure that they do not create high effective marginal tax rates at certain wage rates or for some household structures.

✓ Improve the labour market functioning, especially of workers new to the labour force, by maintaining investments in training quality, continuing to reduce the labour tax and contribution wedge, encouraging social partners to reform collective bargains towards improving work incentives for younger workers and reducing the coverage of non-compete agreements to reduce impediments to inter-firm mobility.

Human capital: Strengthen the quality and pertinence of education

The share of young people who are neither in education, employment or training (NEET) is among the highest in the OECD, and the share of university graduates in the population aged 25-34 years is among the lowest. Weak educational attainment and the quality of that education detract from workforce skills, especially digital skills, amplifying the effects of population ageing.

Recommendations

✓ Continue to expand and improve the technical tertiary schools’ (ITS Academy) quality and access, especially in the South, and strengthen the link between funding and research and knowledge exchange performance for public universities.

✓ Improve quality control for training providers by strengthening the national-level certification scheme.

✓ Continue improving student orientation and aligning curricula with labour market needs.

Innovation: Strengthen financing and collaboration between industry and research centres

Research and development expenditure as a share of GDP is well below the OECD average, constraining Italy’s ability to unlock its innovation potential. Many medium-sized firms are productive in international comparison, but their size limits their resources for research and development, while there are fewer large firms than in comparable economies. The private financing for innovative activities that is common in other OECD countries, such as venture capital firms, is less developed in Italy.

Recommendations

✓ Strengthen links between public research institutions and the private sector, especially small- and medium-sized enterprises that often lack the scale for efficient research and development, making greater use of public development funds.

✓ Support the further development of the venture capital market to finance the merger and growth of medium-sized firms.

✓ Improve the certainty around tax and other incentives to encourage firms’ growth and investment in research and development, based on ongoing reviews of incentives’ effectiveness.

Trade openness: Reduce barriers to services trade

Barriers to services trade are high relative to other OECD countries. While services’ activity has outperformed the broader economy in recent years, productivity growth is particularly weak, partly reflecting regulations that stifle competition, especially in professional services.

Recommendations

✓ Implement competition reforms aiming to reduce entry barriers into services sectors, including by simplifying authorisation procedures and submitting concessions to public tenders at expiry.

✓ Reduce the scope of "fair compensation" rules in professional services.

Recent progress on structural reforms

Reforms across a diverse range of structural issues have accelerated in recent years. Substantial fiscal consolidation and the adoption of the medium-term structural-fiscal plan are improving fiscal health and contributing to declining interest rate spreads and reduced borrowing costs for Italian borrowers compared with other euro-area economies. Reformed labour income tax rates, various tax allowances and support for social security costs are reducing the labour income tax wedge, while early childhood education and care capacity and parental leave allowances are being expanded. The annual competition law is supporting the contestability of markets. Vocational and technical education is being reformed towards engaging more closely with employers’ needs. Incentives and support structures for firms’ research and development and links with research institutions have been reviewed and reformed, alongside the larger review and rationalisation of incentives for firms. Much of the reform effort has been driven by National Recovery and Reform Programme (NRRP) targets and milestones required to access NextGenerationEU funds, and Italy’s authorities have gone beyond those requirements to develop processes to monitor and report on the outcomes of reforms and investments.