Tim Bulman
OECD Economic Surveys: Italy 2026
Abstract
Growth has been resilient in recent years, buoyed by generous tax credits and the National Recovery and Resilience Plan (NRRP), lifting employment and real incomes, although surging energy prices in early 2026 will weigh on demand. With long-term growth prospects remaining relatively weak, a comprehensive package of structural reforms and continued public investment, building on the Medium-Term Fiscal-Structural Plan (MTFSP), is needed to raise productivity, employment and maintain the momentum achieved under the NRRP. The budget deficit has narrowed towards 3% of GDP, but the debt ratio remains very high. Over the coming years, population ageing, climate change and defence needs will add to spending pressures. The MTFSP sets out a path of steady fiscal consolidation until 2031 that would put the debt ratio on a more sustainable path. Achieving this will require significant adjustments to taxes and spending, including curbing ageing-related spending in favour of growth-enhancing expenditure, while raising tax compliance and shifting the revenue policy mix to better support employment and investment
1.1.1. After the strong rebound following the pandemic, growth has moderated
The Italian economy has grown at an average annual rate near 1.2% since before the pandemic, a modest acceleration compared to less than 1% in the previous five years, and outperforming a number of other large advanced economies (Figure 1.1). Employment and real incomes have grown more strongly than in earlier periods. An easing of fiscal policy and government support measures buoyed demand: the ‘SuperBonus’ tax credit led to a surge in construction between 2022 and 2024, while NextGenerationEU grants and loans funding the National Recovery and Resilience Plan (NRRP) averaged 0.5% of annual GDP between 2021 and 2024. Growth is projected to be modest in the near term, weighed down by the surge in energy prices.
Italy has made important progress in its NRRP reform agenda, and the Medium-Term Fiscal-Structural Plan 2025-2029 (MTFSP) extends this agenda. By late 2025, near three-quarters of the NRRP’s 575 milestones had been achieved and three-quarters of the EUR 194.4 billion of EU funds available to Italy had been disbursed. These have tackled ‘horizontal’ issues in the public administration, justice system and regulatory issues, improving the business environment. To accelerate public investments, they have simplified approval processes, developed dedicated project designed and implementation bodies and sought to improve market contestability. More focused reforms have been directed towards priority sectors of digitalisation, the green transition, energy and transport infrastructure, and education and skills. The MTFSP extends and deepens key NRRP horizontal and sector-specific reforms and investments. The government estimates that the NRRP reforms and investments implemented by the end of 2025 will increase GDP by 3.9% by 2031, and that completing the agenda and implementing the investments laid out in the MTFSP will add a further 2.1% of GDP (Ministero dellEconomia e delle Finanze, 2025[1]).
Growth has been moderate but resilient to external shocks
Italy’s economic growth has been moderate. It was 0.8% in 2024, easing to 0.5% in 2025 as global trade policy restrictions introduced in 2025 raised uncertainty for producers, exporters and households, who held back on retail and services spending (Figure 1.1), but resilient investment later in the year lifted growth. Industrial production suffered broad-based declines from mid-2022 to early 2025, before some recovery from later in 2025. This reflected weak external demand and challenges in the automotive, manufacturing and energy-intensive sectors in Europe (Box 1.1). Offsetting this drag was rising investment, construction activity remained near the historical highs last achieved before the global financial crisis, with work shifting in 2024 from tax credit-supported house building work to specialised infrastructure projects. Overall, across the economy, there is modest capacity and scope for activity to pick-up in many sectors without pushing on supply constraints.
The increase in US trade restrictions, uncertainty over US policy and any potential EU counter-measures, and diversion of other major producers’ output have created volatility in trade flows with the US and other markets and heightened uncertainty. Overall, merchandise export values rose in 2025 to make Italy the fourth largest exporter globally. Italy’s exports to the US were equivalent to 3.1% of GDP and 10.4% of total exports at the start of 2025. These rose by 7.2% over 2025 compared with the previous year, largely through the sale of maritime equipment, pharmaceuticals and some specialised machinery exports, but surveys of firms suggest this growth is yet to reflect the effects of higher tariff barriers. Italian firms brought forward some imports from the US ahead of the August 2025 agreement between the EU and the US. That agreement, accounting for the composition of Italy’s exports to the US, imposes an average tariff near the median of OECD countries (Figure 1.1, Panel D). Estimates across various studies suggest these restrictions are likely to reduce exports by at least 1¼% of GDP overall in the short-term, with the effect rising over longer horizons.
Italian producers are facing greater competition from other exporters, notably China, both in Italy and in Italy’s export markets. Italy’s imports from China increased by 16.4% in 2025 compared with the previous year, while exports decreased by 6.6%. This trade reflects the significant and rising production capacity in China, and China becoming competitive in a growing number of sectors where Italy’s had held a comparative advantage, notably in mechanical, electronics and semiconductor production.
Note: Panels A and B: 2025Q4 data are preliminary estimates by Istat. Panel D Estimates based on trade policy announcements as of 8 September 2025 and calculated using weights based on product level data for US imports, by country in 2024. The net sector-specific adjustment change includes a 25% tariff for listed cars and parts; a 50% tariff on steel and aluminium products; zero-rated general goods as well as those related to semiconductors; and country-specific tariff rates. Europe, Japan and the United Kingdom face a maximum 15% tariff on cars and parts (7.5% for British cars within the annual quota) and 0% tariffs are applied to civil aviation products. The United Kingdom faces a 25% tariff on steel and aluminium. China, Brazil and India face additional country-specific tariffs, with varying application across products. Data classifications are based on product-level lists published by the US administration
Source: OECD Analytical Database; and United States International Trade Commission; US Census Bureau, and OECD calculations.
Manufacturing generated about 15% of Italy’s GDP, 16% of employment and 78% of exports in 2024. Activity is diversified across products and approximately 350 000 firms. A sequence of shocks that weakened demand and raised production costs contributed to broad-based falls in output between 2023 and early 2025.
External shocks include the surge in energy prices hampering energy-intensive production, such as chemicals and metals, weak conditions in key European trading partners, lower demand for machinery and other capital goods, a drop in Chinese demand for luxury goods harming textile and clothing production, and reduced US demand and uncertainty following tariff increases. Motor vehicle manufacturing volumes were about 40% lower in November 2025 compared with two years earlier, reflecting weaker demand and the challenges of adapting to low-emission vehicles. In contrast, pharmaceutical production became a leading sector with sustained growth in production, and strong growth in exports supported by an exception for generic pharmaceuticals to the US general 15% tariff.
Source: Eurostat (sts_inpr_m, sts_copr_m, sts_sepr_m)
The current account balanced returned to surplus from 2023 with the decline in energy import values with lower gas prices. The surplus rose to over 1% of GDP in 2024 and 2025, supported by higher goods export values and reduced investment income debits. Italy’s current account surpluses since 2013 have contributed to the shift to a positive net international investment position. This rose to 13.3% of GDP in the third quarter of 2025, supported also by increased valuation of Italian-held assets, notably its gold reserves.
While headline inflation peaked in 2022, core inflation fell steadily from early 2023 to around 2% from late 2024. Core inflation remains higher than the very low rates prior to the pandemic (Figure 1.3). Italy’s price growth has been modest compared with other large euro area countries. Headline inflation was generally below core inflation over 2024 and 2025 due to cuts in regulated electricity and gas prices, and to slower growth of food prices (Figure 1.3, Panel C). However, it has risen again as energy prices increased with the 2026 Middle East conflict. The government in March 2026 introduced temporary reductions in fuel excise, following measures to reduce wholesale gas and electricity prices, towards reducing the inflationary effect of the surge in energy prices. The higher inflation compared with the pre-pandemic period largely reflected stronger growth in services prices. This was due to recovering nominal wage growth compared to very weak wage developments before 2019, with average wage growth running at around 3% annually compared to around 1% before the pandemic.
Source: OECD Analytical Database; and Eurostat HICP tables.
Rising employment has supported incomes
Employment growth was robust in the years following the pandemic, before the pace slowed from early 2025 along with the broader economy’s (Figure 1.4). Total employment rose by 1.7% in the two years to the fourth quarter of 2025, outpacing real output growth over this period. The growth in employment reduced the unemployment rate to 5.1% in early 2026, the lowest rate since the 1990s and below the euro area average. It attracted more adults into the labour force, lifting the employment rate to 62.6% of the population aged 15-64 years, a record high, although some adults moved back into inactivity from mid-2025 as employment growth abated. Employment gains have been largely concentrated among adults aged over 50 as pension reforms encourage workers to work longer, raising the average effective retirement age to 64.8 years in 2024 (INPS, 2025[4]). Much of the employment growth has been in permanent contracts, while the number of workers with temporary contracts fell, reducing their share to 13% of workers, the lowest in 15 years. A large share of the new jobs has been lower-skilled, and in sectors such as labour-intensive tourism, consumer services and construction activities, but growth in higher-skilled and business services positions has been significant too (Figure 1.4). Jobs growth has been stronger in the South and the Islands, supporting incomes and well-being in these historically lagging regions.
Note: In Panel C, ‘Business services’ include sectors J to N of the ISIC rev. 4 classification (information and communication, financial and insurance activities, real estate activities, and professional, scientific and technical activities; administrative and support service activities); ‘Consumer and tourism services’ include sectors G to I (wholesale and retail trade; repair of motor vehicles and motorcycles; transportation and storage; accommodation and food service activities) and R to U (arts, entertainment and recreation; other service activities; activities of household and extra-territorial organizations and bodies).
Source: OECD Analytical Database; OECD Quarterly National Accounts database; and Istat.
Significant potential remains to bring more people fully into the labour force, even if employers continue to report difficulties finding the needed skills, especially in the North. While average hours worked have risen in Italy, around half of part-time employment is involuntary, a higher rate than in other OECD countries although significantly less than prior to the COVID-19 pandemic. Progress in reducing the shares of the young and women remaining outside of the labour force has been slower than among those aged over 50, leading Italy to have one of the highest inactivity rates among OECD countries (see below and Chapter 2). Despite the recent rise in the employment rate among 55- to 64-year-olds, it is still 6.7 percentage points lower for this age group in Italy than in the average OECD country. Meanwhile, the number of Italians emigrating rose to 156 000 in 2024, 0.4% of the population aged between 15 and 74 and over one-third more than in 2023, while the number of Italians who had previously emigrated returning fell to 53 000 (Istat, 2025[6]). Emigrants who return can bring back skills and experience and help to develop cross-border economic networks. At the same time, Italy has one of the highest rates across EU and OECD countries of immigrants who are over-qualified for their jobs, despite the relatively high share with low levels of education (OECD/European Commission, 2023[5]). Measures are being taken to develop and recognise the skills of potential immigrants in their home countries, including under the Mattei Plan (discussed in Chapter and 4).
Source: OECD calculations based on OECD Data Explorer • Incidence of involuntary part time employment; and Eurostat (lfsi_sla_a)
Cumulated nominal and real wage growth¹, 2019Q4-2025Q4
1. Real wages denote wage compensation per employee deflated by the consumer price index.
Source: OECD Analytical Database.
Rising nominal wage rates have helped rebuild real incomes following the 2022 inflation shock. Nominal wage rates in collective agreements rose by 3.1% in 2025 compared with a year earlier, the same rate as in 2024, but real contractual wages were still 8.8% below their level of January 2021. While the rise in employment has particularly benefited lower-skill and lower-pay jobs, their gross wage rates have risen by less than those of higher income workers (Anastasia, 2025[34]). The prospects for further wage growth are mixed, with employment growth moderating and the collective agreements due for renewal covering a modest share of workers. Meanwhile, public sector wage growth has picked up, reflecting a new collective agreement, and helping to reduce the decline in wages relative to the private sector over recent years. Rising nominal wages combined with higher employment has lifted households’ incomes to their highest level per capita in 15 years. Lower income households’ disposable incomes have been further supported by adjustments in tax credits and social contributions and improvements to the social protection system.
1.1.2. The financial sector appears in good health despite heightened external uncertainty
Borrowing rates declined and credit standards eased in the first part of 2025, before stabilising from mid-year, in line with the evolution of euro-area monetary policy. Business borrowing rates fell from 5.6% in November 2023 to 3.5% in January 2026. Borrowing has risen at modest rates reflecting subdued growth in demand from businesses and households (Figure 1.7). A rising share of borrowing is for longer-term loans. Loan growth has lagged the broader economy’s growth, and the credit ratio is about 9 percentage points below the trend rate and less than in most high-income OECD countries (Chapter 4). Many firms’ ample internal liquidity limited their borrowing needs, with those borrowing doing so to refinance existing debt, and, positively for longer-term prospects, for investment. Firms’ financial debt declined relative to their total non-financial assets from 2021 to 2024. Demand for housing picked up in 2025 with volumes and prices rising, but they are below levels that would suggest risks of overvaluation and a correction. Meanwhile, deposits have risen – by 2.3% in the year to December 2025 – with households sustaining solid saving rates. Rising real estate and financial market valuations lifted private sector wealth, with households’ net wealth reaching EUR 11 732 billion at the end of 2024, equivalent to 532% of GDP.
Note: The cost-of-borrowing indicator for households for house purchase is calculated as a weighted average of MFI interest rates on short-term and long-term loans to households for house purchase, where the new business volumes used are smoothed with a moving average of the previous 24 months’ observations. The cost-of-borrowing indicator for non-financial corporations is a weighted average of rates on short-term and long-term loans to non-financial corporations.
Source: ECB.
The financial sector’s health appears to have strengthened, with many indicators improving towards the average of OECD countries. Banks’ capitalisation and profitability have improved (Figure 1.8). Non-performing loans (NPL) ratios are stable near historical lows, although this rate is still higher than in most other major economies, despite the level of non-performing loans being reduced by the public loan guarantees extended during the COVID-19 period (discussed in Chapter 4). Upstream indicators of asset quality improved over 2025 and liquidity ratios are healthy. For banks, forward-looking indicators suggest that this situation is likely to stabilise or may modestly deteriorate over 2026 and 2027. The decline in interest margins following the cuts in policy interest rates and slow growth in new lending (Figure 1.7) may slow the growth in banks’ profitability, even as they seek to bolster their non-interest income. Banks have fully repaid the low-cost ECB TLTRO III funding, replacing these funds with bond issuance and drawing down excess reserves and liquidity. This increased cost of funding contributed to slower lending growth and increased competition for deposits. The modest pace of economic growth and risks to some sectors’ activity from global trade disruptions may weaken banks’ asset quality with increased loan defaults, and Banca d’Italia expects a modest increase in the NPL ratio (Banca d’Italia, 2025[33]). Continued vigilance in monitoring vulnerabilities across the financial sector will remain critical, especially given the heightened risks of external financial market instability.
Some longer-standing issues remain. Holdings of government bonds and other government assets continue to make up a relatively large share of banks’ assets (Figure 1.8, Panel D), with the average residual duration rising from below 4 years in 2023 to near 4.8 years in September 2025. This means banks remain exposed to a deterioration in the government bond market. The banking systems remains fragmented with the large number of regional and cooperative institutions. These generally operate with reasonable health – for example, 2025 stress tests found that in an adverse scenario, smaller banks holding 13% of total assets would not meet prudential requirements. Technological developments, especially the costs of digitalising operations and protecting from cyber risks, places a premium on scale. Merger proposals circulate among the larger banks, while the number of cooperative banks and banking groups has fallen following the completion of earlier cooperative banking sector reform.
Source: ECB; and IMF Financial Soundness Indicators (FSIs).
Conditions also appear to be stable among non-bank financial institutions, which are absorbing a growing share of wealth management as in other economies. Insurance companies’ profitability and investment funds’ assets both rose in 2025. Supervisors are working with institutions to improve their preparedness for disruptions caused by climate events. The sector’s potential liquidity mismatches – with the risk of increased redemptions against illiquid assets during periods of market stress – merits ongoing monitoring and robust stress-testing. Increased redemption scenarios may also bring stress to the sovereign bond markets, given that these are among many non-bank financial institutions’ more liquid assets. Further, banks’ exposure to non-bank financial intermediaries means that stresses in the latter could transmit to the banking sector.
1.1.3. While the budget deficit has been reduced, rising public investment has supported activity
While the deficit remains higher than prior to the pandemic, it has narrowed substantially compared to the COVID-19 peak in 2020 and the elevated levels recorded until 2023 (Figure 1.9). Following the expansion to the deficit due to the COVID-19 shock, the public deficit in Italy remained wide due to substantial support policies, notably the ‘Superbonus’ tax credit for building renovations. The withdrawal of these measures allowed the budget deficit to decline, and fell in 2025 to slightly above 3% of GDP, while the primary budget balance returned to surplus in 2024. Rising personal income tax revenues and social security receipts – reflecting the labour market’s strength – also contributed to this improvement. Under accounting rules, the government expects the effects of the renovation ‘Superbonus’ credits on the change in the public debt ratio to be exhausted by 2027.
Note: Maastricht definition of gross debt shown.
Source: OECD Economic Outlook database; Eurostat (gov_10a_taxag)
Increased disbursement of public investment financed through grants from European programmes such as the NextGenerationEU facility has buffeted the effects on the economy of the support measures winding up (Figure 1.10). The disbursement of the NRRP is projected to accelerate ahead of its late 2026 deadlines for reforms and payment requests. The government agreed with the European Commission in late 2025 revisions to milestones and targets to support the Programme’s complete implementation in 2026. Some of these revisions provide for special-purpose financing facilities to enable work to continue into 2027, for example to construct student housing. Through the MTFSP, it also plans to pass from projects funded through the NextGenerationEU facility to other sources of financing to maintain the real value of public investment to 2027. Italy has been among the countries with the highest implementation rates of NRRP reforms. Disbursing investment funds has been more challenging, particularly in active labour market programmes, and in investments in net-zero emission technologies and in agricultural supply chains and these disbursements are expected to be prolonged. As the NRRP and other EU-funded public investment programme implementation schedules are adjusted, prioritising measures expected to bring the greatest economic benefits will better bolster Italy’s long-term economic prospects.
The path of declining budget deficits laid out by the MTFSP, along with the policy stability and progress in structural reforms have contributed to agencies upgrading their ratings of Italy’s sovereign debt default risk, and to reducing the premium on borrowing paid by Italian entities relative to entities in Euro-area jurisdictions (Figure 1.10, Panels B and C). The upgrading of the national government’s rating has allowed subnational authorities’ ratings to also be upgraded and reduced financing costs for large private borrowers. The support to investment and household finances from lower financing costs can more-than offset the contractionary effects of the progress decline in the fiscal deficit, especially given the importance of both for Italy’s growth prospects.
Source: Bloomberg; and Eurostat (gov_rrf_use); and OECD Analytical Database.
1.1.4. Growth is projected to be modest in the near-term, weighed down by external developments
GDP growth is projected to remain modest at 0.4% in 2026 and 0.6% in 2027 (Table 1.1). While the economy’s momentum was improving around the turn of 2026, the surge in energy prices and increased geopolitical uncertainty following the renewed Middle East conflict from early 2026 is projected to offset this, weighing on households’ consumption and businesses’ production. Government measures to reduce energy costs for low-income households and firms in sectors highly exposed to high fuel costs such as road transport, fishing and agriculture, absorb some of this shock. Support to growth will be provided by rising public investment with increasing disbursement of the NRRP funds, which will be maintained in 2027 under the MTFSP. In 2027, increased demand from Italy’s main trading partners is likely to support growth, and can lead households to raise their consumption. Domestic private investment is also expected to be supportive, bolstered by Italy’s improved credit rating and economic depth attracting private finance and reducing borrowing costs.
Employment growth is likely to moderate from recent rates with slower growth in the economy. The projected driving role of investment for overall GDP growth, the weaker growth in services exports following the exchange rate’s appreciation and expected modest growth in private consumption are all likely to slow growth of jobs in services sectors. Further, uncertainty over the outlook is passing into firms’ hiring plans. Slower growth in employment is expected to induce fewer adults into the labour force, limiting the increase in the unemployment rate.
1. Contributions to changes in real GDP, actual amount in the first column.
2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.
Source: OECD Economic Outlook 118 database.
In the medium term, pursuing reforms and investments, building on those in the MTFSP, would help improve growth prospects and reinforce fiscal sustainability. Sustaining well-designed and economically cost-effective public investment at rates similar to other OECD economies would keep construction activity at its current high levels and boost productivity over time. Reducing non-wage labour costs would help encourage greater employment and raise disposable incomes, lifting consumption. Reducing barriers to entry for example for professional services can help deepen that sector, improve its competitiveness and reduce costs for other parts of the economy.
Risks to the outlook are substantial and are tilted somewhat to the downside. The 2026 Middle East conflict generates significant uncertainty regarding the supply and cost of energy and other inputs, and trading partners’ demand (Box 1.2). In addition, trade policy restrictions, greater competition with any deflection of trade away from the United States towards Italy and its export markets, the euro’s appreciation and uncertainty may create a deeper drag on exports, activity, investment and employment than anticipated, amplified by households increasing their precautionary savings. Potential volatility in global financial markets, following recent heightened valuations and significant inflows of external funds, could lead to an outflow from Italian financial assets, notably government bonds, raising borrowing costs. Recent improvements in fiscal management and the labour market may prove to be more ephemeral than expected, with negative consequences for private investment and household spending. Conversely, government reforms, ranging from improvements to the business environment and the public administration and investments from infrastructure to skill development, may encourage businesses to invest more than expected, making use of their improved balance sheets and liquidity. An increase in geopolitical tensions in Europe could negatively impact the Italian economy. Table 1.2 outlines other potential risks to the medium-term outlook.
The 2026 Middle East conflict and related blockages of major oil and gas shipping routes have renewed volatility in global energy markets. Despite progress in diversifying gas supply since 2022, Italy remains exposed by the heavy reliance on imported fossil fuels, although the Middle East supply makes up a relatively modest share of overall imports. With fossil fuels supplying about three‑quarters of total energy use and 45% of electricity generation, higher global prices pass rapidly into domestic inflation, including through input costs in food and manufacturing. Energy‑intensive industrial sectors generate approximately one‑third of manufacturing value added and over one-fifth of employment. They have improved their efficiency since the 2022–23 shock but remain highly sensitive to price spikes, given limited short‑term substitution possibilities. Higher energy prices reduce households’ real incomes, as wage indexation is limited and multi‑year collective agreements slow nominal wage adjustment. Higher energy import prices mechanically weaken the trade and current account balances, reflecting approximately four-fifth of Italy’s net energy consumption being sourced from imports. Weaker economic activity plus any public support measures overall detract from the fiscal position, even if indirect tax receipts may be supported in the near-term by higher prices, with the government’s temporary fuel excise tax reductions announced in April 2026 are partly financed by higher VAT receipts.
1.1.5. Raising growth into the long-term will require continuing ambitious reforms to encourage greater investment and employment
Italy’s longer-term growth prospects remain modest compared to many other advanced economies, despite a level of per capita incomes that is significantly below the best performing economies. OECD long-term projections suggest that GDP growth would average less than 1% per year over the next decade, supported by rising productivity, employment rate and investment. GDP per capita growth is projected to be modestly higher at close to 1.2%, as the overall population is projected to fall faster than the number in employment (Figure 1.11). This is slightly below its current growth rate. Raising productivity growth, as well as a higher employment rate are central to more sustained gains in living standards for Italians and would also help to improve the sustainability of the government debt and meet ageing and climate challenges. Achieving this will require improving business dynamism, such that the more productive medium-sized and larger firms grow and innovate. Shifting the tax mix away from employment and production and towards sources with a lower drag on activity will help raise employment while maintaining revenues.
Contributions to projected potential growth in GDP per capita
Note: Projections account for policy reforms introduced or planned through to 2026.
Source: Long-run scenarios using OECD (2025[1]) Long-Term Model and OECD calculations.
The priority policy recommendations set out in this and the previous Economic Surveys to improve productivity and employment are estimated to raise GDP substantially in the long run, in addition to the NRRP and structural plan measures. Table 1.3 presents the estimated effect on GDP over 10- and 25-year horizons relative to a baseline of the growth projections following the NRRP implementation, with respect to policy areas where modelling is available for the impact on GDP. While these estimates are uncertain, they underline the significant potential to raise growth and living standards in Italy through continued ambitious reforms.
Simulated effect of selected reforms on the level of GDP, %
Source: Long-run scenarios using OECD (2025[1]) Long-Term Model and OECD calculations.
The full implementation of the NRRP will help raise longer-term growth prospects by addressing many of the long-standing barriers in Italy to raising GDP, including improving the functioning of the justice system, public administration, digitalisation, competition, and the business climate. The MTFSP (Ministero dellÉconomia e delle Finanze, 2024[47]) lays out an agenda of reforms and investments for the years following the NRRP, including implementation of remaining NRRP measures and additional reform commitments building on the NRPP in the areas of education, research, labour market, public administration, justice and procurement. The MTFSP maintains the average level of public investment under the NRRP until 2029. The government estimates that the NRRP’s reforms and investments implemented by the end of 2025 will provide a substantial boost to the level of GDP by 3.7% by 2030. The government projects the remaining NRRP reforms and investments to raise GDP by a further 2.3%, while it estimates that those provided in the MTFSP will add 0.4% to GDP. These substantial estimates underscore the importance of completing and ensuring full implementation of the NRRP reforms and pursuing the MTFSP, while also building on this Plan to continue the momentum of the NRRP into the medium-term.
Achieving substantially stronger growth into the longer-term requires a comprehensive reform package, that builds on the impetus of the MTFSP and the NRRP from recent years. This should include increasing the efficiency and re-orienting spending from pensions to innovation and education; strengthening efforts to raise tax compliance and reduce the tax burden from labour taxes to property, and broadening the tax base (as discussed below). As discussed in Chapter 4, pursuing measures to reduce regulatory compliance burdens, increase competition, improve innovation efficiency, streamline business support, and to increase access to finance and risk capital would help to make Italy’s business sector more dynamic, support the scaling-up of successful firms and raise investment and productivity. This package would build on the priorities of the MTFSP (Box 1.3).
Across the NRRP and MTFSP policy priorities, a cross-cutting issue is improving the integrity and effectiveness of how public institutions operate and regulate (Figure 1.12). On-going reforms including those driven by the NRRP are improving areas including the responsiveness of the judicial system and quality of public investment management and will be pursued through Italy’s MTFSP (Box 1.3). However, the large gaps with Italy’s peers indicate the importance of continuing these efforts to improve practices.
Source: World Bank WDI; and OECD Government-at-a-Glance; Eurobarometer 2025 (QD9b).
The Medium-Term Fiscal-Structural Plan 2025-2029 (MTFSP) incorporates 24 reforms and investments intended to raise growth potential while improving fiscal sustainability (Ministero dellÉconomia e dell Finanze, 2025[47]). Under the revised European fiscal framework, the approval of Italy’s MTFSP allows for a fiscal adjustment over seven years rather than four, giving time to reduce the budget deficit while pursuing growth-supporting investments and reforms.
The reforms are both horizontal and targeted sectoral reforms. Many pursue the National Recovery and Resilience Programme (NRRP) reforms. They include reducing delays in the civil justice system, improving the public administration including through digitalisation and simplification, upgrading childcare, reforms to public procurement, competition and the investment climate to improve the business environment, tax collection reforms and streamlining fiscal incentives, strengthening active labour market policies and vocational training, and reforming social protection. The government expects these measures to add 0.4% to GDP by 2031.
Regarding public investment, while the Plan does not follow the approach of the NRRP in providing specific amounts for each priority, it does provide for ensuring the NRRP resources are fully executed, and that public investment is sustained near the 3.5% of GDP levels achieved under the NRRP.
Raising participation to reduce the drag from the ageing workforce on growth prospects
Italy’s ageing workforce and shrinking working age population are a headwind to growth. Raising the contribution of Italy’s youth by increasing their employment rates, improving skills and reducing emigration through reforms to the school system, tertiary education, labour market and stronger efforts to help young people find high-quality jobs would help address this (Chapter 2). Raising the share of women in work, and keeping older people in work for longer, particularly the large cohort currently aged between 50 and the standard retirement age of 67 years (which rises to 67 years and 3 months in 2028), would help (Figure 1.13).
While the statutory retirement age in Italy is 67 for men and women since January 2025, the average age of labour market exit remains younger than the OECD average. Temporary early retirement schemes such as Quota 103 and Opzione Donna allowed people to exit the labour market early, but these ended in 2025. Other early retirement schemes remain for specific categories of workers, such as those with long career histories or those in arduous professions or for women who have had children. The criteria underlying early retirement schemes should be rationalised to encourage adults to remain attached to the labour market and improve equity across workers. Few workers combine working with a pension or work beyond the statutory retirement age, reflecting weak incentives to remain in work. Strengthening sickness and disability insurance and facilitating mobility to less physically demanding jobs through reskilling would help older workers remain in the workforce (OECD, 2025[38]). While age discrimination was explicitly prohibited in Italy since 2003, it remains very frequent, with 56% of workers older than 50 identifying as victims (PageExecutive, 2024[39]). Fiscal incentives were recently introduced for firms hiring and training older workers, as well as funds for training. To further facilitate occupational mobility and up-skilling, services and training programs offered by the public employment service could be extended to employed workers, as in the German WeGebAu (OECD, 2018[40]).
Source: OECD Employment database.
Despite significant progress, Italy’s labour market could make better use of women’s skills. Female participation is the lowest in the EU (Figure 1.13), lagging far behind men, and many women work part-time. Only around 55% of Italian women with children work, and only 35.3% in the South. Even 15 years after giving birth, working mothers earn on average 40% less than other women and work for fewer hours. Care for other dependents, including elderly family members, and other unpaid household work also weigh significantly more on women than men, limiting their ability to take jobs requiring more flexible working time or longer commuting or travel, a pattern seen in other OECD countries, especially where access to formal care has been limited. To strengthen childcare access, especially in the South, Italy planned to create about 150 500 new childcare places through the NRRP, offering spaces to an additional 9% of all 0- to 6-year-olds, and the MTFSP extends this ambition to ensure 33% coverage nation-wide. Yet progress so far has been slow, with objectives revised down and with a low share of the new childcare places available by the school year 2025/2026. More equitable sharing of care tasks will require changing household behaviour. Increasing fathers’ role in childcare from the child’s birth can help achieve this. Italy has compulsory paternity leave of 10 working days (20 days in case of multiple births), which must be taken around the birth and cannot be transferred to the mother. Use of parental leave is skewed and allocates only 20.5% of the full-rate equivalent leave to fathers (approximately 1.4 weeks, compared to 2.3 weeks across the OECD), while the rest is either earmarked for mothers or “shareable”, although the allowance for the three months of optional parental leave, available to either parent, has recently risen from 30% to 80% of the salary. Further extending paternal leave and encouraging greater take-up by fathers of their parental leave could help, including by promoting visible role models within companies and in the broader community.
Italy has a substantial budget deficit and the third highest government debt ratio in the OECD, after Japan and Greece (Figure 1.14). Improving the sustainability of Italy’s public finances, including lowering interest costs, remains central to Italy’s broader prospects. The debt ratio rose above 137% under the Maastricht definition in 2025, and is expected to rise further in the coming years. It remains modestly above its pre-COVID levels, as high inflation boosted the nominal value of GDP, offsetting the effects of large budget deficits. The underlying debt dynamics are now unfavourable with the effective interest rate higher than economic growth, while the effect of the earlier ‘Superbonus’ housing renovation tax credit on cash receipts will raise the debt ratio further in 2026 and 2027. This high level of debt increases the sensitivity of the debt ratio to growth and interest rate shocks. While the risk premium on Italy’s public debt has significantly narrowed in recent years and agencies’ have upgraded their ratings, these remain sensitive to developments in Italy. Further, Italian government debt ratings are only two or three steps above the investment grade threshold. The term structure of outstanding debt is near the average of Euro area countries at close to 8 years, but gross refinancing needs are currently near 25% of GDP. Increases in the market interest rate for Italian government debt would increase the cost and detract from access to financing for other Italian private and public entities, and would weaken the banking system through banks’ significant government debt holdings.
Note: Gross government debt (Maastricht criterion for European countries).
Source: OECD Economic Outlook 118 database; and OECD calculations.
Continuing the expected reduction of the budget deficit to below 3.0% of GDP in 2026, Italy committed in its MTFSP to an ambitious fiscal consolidation that would keep net nominal non-interest spending growth financed by national sources to 1.5% annually until 2031, well below the nominal potential growth rate of the economy. The net spending measure excludes interest expenditure, cyclical unemployment spending, and one-off spending measures and is net of discretionary revenue measures. The path for net expenditure aligns with Italy’s commitments under the revised EU fiscal rules (OECD, 2025[46]). It implies improving the structural primary budget balance by around 0.5 percentage points of GDP on average each year, which would raise the primary budget surplus to above 2% of GDP by 2030 and reduce the government debt ratio by at least 1 percentage point of GDP a year on average from when the Excessive Deficit Procedure is exited through to the early 2030s. If there are no tax changes, this path implies that primary expenditure would decline by 2 percentage points of GDP between 2025 and 2031. The 2026 Middle East conflict is likely to create further challenges for the planned consolidation. While the associated faster price growth with higher energy prices may support revenues in the near-term, the drag on activity from the crisis plus the cost of any additional support measures that follow the temporary reduction in fuel excise rates and support to road haulage, fishing and agricultural firms announced in March and April 2026 could slow the fiscal consolidation.
Achieving the fiscal objectives to limit spending growth, narrow the deficit and reduce the debt ratio as planned will need to be reconciled with the anticipated growth in spending pressures into the early 2030s:
Ageing costs are projected to rise by at least 1% of GDP by the mid-2030s under current policies, especially due to higher pension expenditure, before abating from the late 2030s as the effects of past pension reforms kick in (European Commission, 2024[36]) (Figure 1.15).
Health and long-term care costs are also projected to rise by ½ percent of GDP by the mid-2030s as the share of elderly in the population rises (European Commission, 2024[36]). Education costs are projected to decline modestly with fewer school-age children (Figure 1.15).
Defence spending is projected to increase to reach the NATO target of 3.5% of GDP by 2035 (Figure 1.15, Panel B).
Public investment is expected to remain near 3¾ percent of GDP from 2026, above Italy’s historical rates and the OECD average (Table 1.6).
Source: EU 2024 Ageing Report, OECD calculations and estimates. Stockholm International Peace Research Institute, national budgets and planning documents and OECD calculations.
Italy has committed to achieving the NATO defence expenditure target of 3.5% of GDP by 2035. Under European fiscal rules, the increase in defence expenditure can be excluded from net expenditure growth targets at least until 2028 if Italy requests the activation of the National Escape Clause, although it will still add to budget financing and debt reimbursement needs. The increase in defence spending would follow a rise from 1.5% of GDP to 2.0% of GDP between 2024 and 2025 under the NATO definition, which includes spending on defence personnel’s pensions, which was largely achieved through reclassification of other spending. A stronger defence capacity can help maintain its Italy security and support its international partners in an increasingly complex geopolitical environment. The increased defence spending may need to focus on equipment and infrastructure spending as personnel payments currently make a higher share of defence spending in Italy than in most OECD countries. Italy’s diverse industrial capacity and the spare capacity following recent years’ subdued industrial activity suggest that increased defence equipment and infrastructure spending in Italy and its allies could help to boost Italian industry. Achieving this boost and increasing infrastructure and equipment spending will require strengthening procurement and management systems, including in coordination with other countries.
Climate change is likely to bring additional fiscal costs pressures. First, climate change mitigation efforts may require public investment and incentives. Second, social spending may need to increase to support specific groups through the energy transition. Third, while carbon taxes may bring additional revenues for a period, the shift to electric vehicles will lead to a substantial loss of revenues from motor fuels in the absence of an alternative distance charging system. Fourth, there will be costs to adapt the economy to climate changes. Fifth, Italy is more exposed to direct damages and extreme weather events than many OECD countries: the Parliamentary Budget Office estimates that these costs will reach 0.9% of GDP annually by 2050. A more comprehensive assessment of the fiscal impact of the climate transitions and risks should be a priority.
Under existing tax and spending setting, and assuming no further near-term fiscal consolidation, the public deficit and debt ratio would increase further (Figure 1.16, Panel A, red line). This reflects the size of the initial primary surplus, anticipated increases in age-related pension and health expenditure and education and net fiscal cost of climate change. Higher defence spending, in line with Italy’s international commitments to respond to resurgent geopolitical risks, will also add to fiscal pressures, especially in the 2030s once the temporary exclusion from the expenditure growth rules expires.
A prudent path under the EU fiscal rules and consistent with Italy’s MTFSP would see the debt ratio on a steady downward trend (Figure 1.16, Panel A, blue line). Accounting for expected ageing, health and climate costs and higher defence spending, this requires a medium-run fiscal adjustment of around 3¾ percentage points of GDP between 2027 and the mid-2030s. Into the longer-term beyond the mid-2030s, to meet the full commitment to raise defence spending and if other pressures are greater than expected, a further adjustment in spending or revenues would be necessary to sustain this debt path.
The fiscal adjustment will be challenging. Given the gradual nature of the adjustment and provided that public investment is maintained, the impact on growth should be modest (OECD, 2024[21]). However, the primary budget surplus would reach 2½% of GDP from the early-2030s, compared with an average of 1.5% of GDP between 2011 and 2019 in Italy. Over the past 30 years only a few OECD countries – Italy among them – have maintained primary surpluses above 1½ percent of GDP for sustained periods (Eichengreen and Panizza, 2016[42]). These projections are sensitive to assumptions around interest rates, nominal growth rates and the size of the primary budget surplus (Figure 1.16, Panel B). If the ‘snowball effect’ of interest rates less the growth rate was 1½ percentage points higher from 2026 through the projection period, the public debt ratio in the prudent scenario would continue to rise into the mid-2030s, then fall only gradually in the absence of any additional policy efforts.
Note: Based on the methodology of the OECD Long-Term model, the long-term interest rate is assumed to rise to stabilise at 4.2% and the weighted average interest rate to rise to 3.2%, 0.6 percentage points higher than the weighted average rate in late 2025. The ‘current tax and spending structure’ scenario (red line) assumes that the structural primary fiscal balance before accounting for net ageing and climate-related costs remains constant at 2027 levels. Net ageing costs are defined as changes in expenditure on old-age pensions, health and long-term care and on education. The costs of climate change are based on the Parliamentary Budget Office’s estimates of the cost of climate change-related disasters assuming a reduction in global emissions in line with the Paris Agreement by 2050 of 0.9% of GDP, plus an adjustment of 1.5% of GDP to reflect lost fiscal revenues and increased expenditures related to emission reduction measures. The increase in defence spending towards the 3.5% commitment by 2035 is projected to be limited over 2027-2029 then to rise towards the target with approximately one-third of the increase financed through special collective- or national-financing arrangements. The ‘prudent path under fiscal rules’ scenario (blue line) assumes that ageing- and climate-related costs are offset and that the headline budget deficit gradually decreases from 2027, in line with the adjustments outlined in Table 1.4, consistent with the path outlined in Italy’s Medium-Term Fiscal-Structural Plan. The ‘prudent path with growth impact of structural reforms’ scenario (green line) follows the ‘prudent path’ scenario while accounting for the effects of the structural reforms reported in Table 1.3 on the level of GDP and on revenues
Source: OECD calculations based on OECD Economic Outlook database and OECD Long-Term Model.
Boosting growth through structural reforms, such as those recommended in the Survey, would help to reduce the debt burden while increasing employment, income and tax revenues (Figure 1.16, Panel A, green line). Table 1.3 above outlines the estimated boost to GDP of some of these recommend reforms. This boost would create a more positive dynamic for public finances, mechanically through faster growth in the volume of GDP, and by increasing public revenues as they raise employment and productivity, lifting wages and spending. This would help to moderate the required fiscal adjustment in later years, underscoring the importance of continuing to implement an ambitious reform agenda.
The scale of the required adjustment in spending and tax policies is historically large, while also addressing spending pressures and ensuring adequate levels of investment in infrastructure and in areas such as innovation, skills and labour market policies that also need to be better funded. Italy has the seventh highest ratio of spending to GDP in the OECD at close to 50% and headline tax rates are already high. Fiscal adjustment therefore should raise the efficiency of spending and prioritise where money is spent, notably the large share currently allocated to pensions, although tax collections may also need to rise – while becoming more growth-friendly – given the scale of the adjustment needs. Table 1.4 sets out an illustrative package that would achieve this consolidation while funding the structural reforms set out in this Survey and aiming to minimise the impact on long-term growth and on equity. This package relies primarily on spending measures, notably on curbing pension spending and reducing poorly-targeted tax expenditures, while providing further support of innovation. On the tax side, the main avenue for raising revenue is durable measures to improve compliance, and these can fund reforms to make the tax system more growth-friendly in a revenue-neutral way. Reforms to lift employment rates and skills would generate additional revenues alongside higher incomes. How spending and taxes could be made more efficient is discussed in the following sections.
1. Spending and revenue measure subheadings do not include pension-related measures.
1.2.1. Containing spending pressures and improving spending efficiency and integrity
Containing and improving efficiency and prioritising of public spending will be required to maintain fiscal sustainability and the government’s 1.5% average annual expenditure growth ceiling alongside the rising spending needs. Experience across OECD countries suggests that reducing the scale of overall public expenditure will be more sustainable than revenue-based measures (Pina, Hitschfeld and Miyahara, 2025[35]).
The scope to reallocate spending is constrained by the high share of old-age pensions, together with social payments and interest costs. Pensions account for close to 30% of the total spending and are subject to upward pressures in the coming decade. If this share continues to increase, required spending adjustments will need to be proportionately greater in other areas where Italy spends less relative to its peers, such as health, education and research. Low spending contributes to dissatisfaction with public services and waiting lists in areas such as health, and inadequate spending on pro-growth areas such as education, skills and research. Potential areas for savings alongside pension expenditure, while protecting service delivery, include improving procurement and investment spending effectiveness, and carefully using the coming wave of public service retirements to reduce the already modest and declining personnel costs.
Containing pension spending
Italy has one of the highest ratios of social security spending to GDP across the OECD (Figure 1.17, Panels B and C). The reflects the high spending on old-age and survivor pensions, while expenditures on housing, social exclusion and health are lower than in most of the Euro area. At 6.2% of GDP in 2023, government health expenditures are relatively low compared to the OECD average of 6.5%, especially given Italy’s older demographic profile, and Italy has recorded among the slowest growth rates in health expenditure across OECD countries since the pandemic. Long-term care spending is below the EU average at 1.6% of GDP, and is projected to rise by approximately ½ a percentage point of GDP over the coming decades.
Past pension reforms are extending working lives and contributing to keeping the rise in expenditures below the rate of the population’s ageing. The increasing labour force participation among adults aged over 55 years reflects this and will support those workers’ retirement incomes and the broader sustainability of the pension system and public finances. Reforms in the early 2010s increased statutory retirement ages and tightened early retirement conditions, and linked changes in life expectancy to pension eligibility ages and to requirements for early retirement. They accelerated the transition from the more generous defined benefit scheme to the notional defined contribution calculation framework that was introduced in 1995. Nevertheless, pension payments remain more generous for many pension recipients than in most other countries, although the large number of small pension recipients reduce the average ratio of pension income to employment income (Figure 1.18). Meanwhile those outside the system suffer low old-age incomes. The shift to the post-2011 regime will only start to reduce pension expenditure from the late 2030s. Many current retirees continue to benefit from the more generous legacy defined-benefit regime solely in place before 1995, which provides pensions that are significantly above recipients’ contributions.
2024
Note: In panel A and B, interest costs and investment have been deducted from all spending categories.
Source: OECD National accounts.
There is nevertheless scope for further savings in pensions in the coming years and different options can be explored. Constitutional court decisions from the mid-2010s required pension reforms to meet some criteria. They permit reforms that improve the long-term sustainability of the system for future recipients even if they reduce current recipients’ pensions, while requiring reforms to be ‘not unreasonable’, for example by being limited in time, justified by exceptional budgetary needs, and if they do not undermine pension adequacy or target a particular group. Several reforms approaches may meet these requirements. First, generous pensions under the legacy scheme could be scaled back. In 2024, pensions of over EUR 5000 per month made up 10.2% of total pension payments and 2.8% of recipients, while 28.1% of recipients received pensions below EUR 1000 (INPS, 2025[4]). A progressive social contribution applied to the portion of high pensions that do not reflect the recipients’ contributions to the pension system would improve equality between generations and reduce the burden on today’s workers (OECD, 2024[21]). A similar measure was introduced by Greece in the form of a social solidarity contribution, which has been retained even as its fiscal position has improved. By applying to pension income that does not reflect contributions, it may avoid the constitutional prohibition on curtailing acquired rights (Patriarca, Patriarca and Boeri, 2014[49]). This would reinforce recent measures that did not index the most generous pension payments when inflation was high, reducing their real value. Second, generous survivor pensions, costing 2½% of GDP include substantial payments to people of working age: 16.6% of new beneficiaries of survivor pensions were younger than 65 in 2022. Limiting the benefits available to adults who are able to earn an income, including those not in employment, would encourage employment among survivors for whom this is feasible, while support to other categories of vulnerable survivors, when appropriate, could be addressed through other forms of social protection (including assegno di invalidità).
Gross and net pension replacement rates, % of pre-retirement earnings at 100% of the average wage, 2024
Note: The future replacement rate is calculated for workers with average earnings and a full career from age 22. Calculations are based on the normal retirement age indicated in brackets. The net replacement rate is the net value of the pension entitlement relative to individual net earnings, taking account of personal income taxes and social security contributions paid by workers and pensioners.
Source: OECD Pensions at a glance 2025.
Central to pension sustainability under the earlier reform is the increase in the retirement age including by linking the statutory retirement age to life expectancy. The 2025 budget temporarily extended the ‘Quota 103’ scheme that allows early retirement at age of 62 years with 41 years of contributions under the notional defined contribution rules. The 2026 budget did not extend this scheme nor the ‘Opzione donna’ scheme, while it maintains the planned increases in the statutory retirement age tied to life expectancy, with a one-month rise in 2027 and a total of three months by 2028. It exempted workers in strenuous or hazardous professions from this increase. These professions include construction, mining and nurses, along with primary school teachers, agricultural workers, seafarers, and shift workers among other categories. Narrowing the scope of early retirement schemes and maintaining the planned life expectancy-linked increases in the retirement age are welcome. Breaking the link between retirement age and life expectancy would create lasting additional fiscal pressures, and would reduce per capita incomes due to lower labour force participation (Figure 1.19). To ensure longer working lives are feasible, boosting access to adult education and skills can allow workers to shift professions or sectors as their interests and labour force demand evolve, and support more flexible and gradual transitions from work to retirement.
Supplementary pensions are developing although from a small base, creating a growing pool of capital and source of future retirement incomes. At the end of 2024, about 10 million workers were enrolled in supplementary pensions, with total assets under management reaching 10.8% of GDP and 4% of Italian households’ financial wealth. The reforms of 2012 and 2023, which introduced the automatic transfer of severance pay contributions (TRF) for private and public employees into private pension funds unless the worker opts out, have contributed to the growth of this sector. The 2026 budget strengthened these incentives, including for the self-employed. Participation remains limited and unequal, with low take-up among self-employed workers, women, young employees, workers in small firms, and in the South and higher coverage among people with higher financial and pension knowledge. The 2026 budget adds further incentives to contribute including increasing the tax-free contribution to EUR 5 300, strengthening the default participation in supplementary pensions including for workers in smaller firms, and expanding pension portability and benefit options. Further promoting private pension saving would support future incomes and reduce pressure on the state system.
Scenario of retirement age being held at 67, relative to a baseline of current policies
Source: Scenarios using OECD (2025[7]) Long-Term Model and OECD calculations.
Spending in other areas of social protection in Italy is generally low relative to European standards, with the exception of spending on short-time work schemes. Italy’s social safety net remains relatively limited under the new inclusion allowance scheme (ADI). Access to social security is complicated by cumbersome bureaucratic processes, and differences in subnational administrative capacity and quality of governance lead to unequal accessibility and quality of services.
Raising the integrity of public spending and addressing corruption risks
A long-standing issue weakening the effectiveness of public spending has been risks of corruption (Figure 1.20). The high public revenue mobilisation and importance of public measures in raising Italy’s growth prospects underscores the importance of ensuring the integrity of how the state uses public resources. Increased public investment is welcome for longer-term growth prospects but also brings particular corruption risks. Across perception-based indicators, the overall levels and trends suggest that Italy lags most high-income OECD countries in ensuring the public sector operates with integrity, although such indicators can be influenced by differences between countries in the interpretations of what constitutes corruption and by media coverage of corruption around the date of the survey (Rizzica and Tonello, 2020[27]). The independent anti-corruption agency (ANAC) monitors and pursues corruption risks, within the framework of a national three-year anti-corruption plan. It plays an active role in putting in place robust practices and tools to fight corruption and in identifying corruption cases. There has been a substantial increase in the number of whistleblower cases it handles. Other bodies complement its work, including the Direzione Investigativa Anti-Mafia, the Court of Auditors, the Parliamentary Budget Office, and their analysis and reporting improve clarity and can inform measures to address risks. Italy is particularly rich in open data, which can prevent resource misuse and encourage efficiency given the scope for analysis and reporting by official bodies and civil society.
Nonetheless, some policy actions can weaken perceptions of integrity and effectiveness. For example, overly formalistic procedures that give discretion to enforcement, temporary support measures, repeated adjustment of rules and regulations, generous allowances, or concessions on paying tax debt can contribute to a perception that rules are flexible rather than transparent, reliable and universally applied. These could be addressed through a comprehensive programme to review and reform the existing stock of regulations and their enforcement, simplifying government processes and continuing efforts to improve the responsiveness of the judicial system (Chapter 4), and the MTFSP includes measures in these directions among its priorities. To accelerate procurement and support NRRP implementation, the 2023-2024 reforms expanded the use of non-auction procedures for public works contracts of up to EUR 5.3 million and goods and services purchases of up to EUR 140 000. However, these bring risks of lowering competition and value-for-money, and of corruption, particularly where transparency and oversight are weak (Decarolis et al., 2025[29]). ANAC has documented a large increase in the number of contracts passing with non-competitive processes, and evidence of contract splitting so tenders can pass with less oversight (ANAC, 2025[31]). Lower thresholders for competitive processes can be reconciled with timely spending by making procurement processes more responsive.
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption”
indicator by the Varieties of Democracy Project.
Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy
Project, V-Dem Dataset v12.
Raising the effectiveness of public workforce spending amidst its demographic transition
Reforming the management of the public sector is ongoing (Table 1.6). The overall spending and size of the public workforce is smaller than in most OECD countries, but it is still sizable. The workforce is older than in any other OECD country – largely due to the hiring freezes of the 2010s – and almost half will reach retirement age over the coming decade, creating an important opportunity for change (Figure 1.21). This may help to change practices, including regarding performance management and digital skills, and creates an opportunity for personnel to move to fill skill gaps, including at the subnational level (OECD, 2025[24]). Measures implemented since 2022 under the NRRP and to be pursued under the MTFSP aim to strengthen the public workforce through hirings, technical and digital training and better linking salaries and performance. They have lowered the average age of the workforce and are attracting young talented graduates, enabled the roll-out of new performance management and training processes, and are expected to improve the public sector’s effectiveness over the coming years.
Improving public servants’ performance, rather than further reducing staff numbers, is central to reforms. A comprehensive review and adjustment of public servants’ pay was legislated in 2025, supporting renewal of collective agreements and harmonising pay rates across sectors. These measures can help close the gaps with private sector pay. If accompanied by stronger performance management, greater delegation in management processes and willingness to reduce the historically high compression in public pay rates – as planned under the NRRP and MTFSP reforms – can help improve the effectiveness of the public sector (Marcinkowski, Butnaru and Rabrenović, 2024[25]). Feedback on workers’ performance could be made more complete and linked to training (OECD, 2025[24]). Pursuing reforms to hiring and promotion processes, including to the demanding exam-based entrance and selection process, and other civil service protections can improve the flexibility and attractiveness of the public sector. To support performance and reallocation of staff resources, practical barriers to mobility across central government administration, currently permitted but not encouraged, could be addressed and mobility systematised. This can also help support integrity and reduce risks of nepotism, as discussed in the previous Survey.
Distribution of employees in the central administration by age, 2023
Source: OECD Government at a Glance 2025.
Coordination of personnel management reform efforts with sub-national governments is a further challenge, especially in decentralised areas such as healthcare. About two-thirds of public personnel spending is by subnational governments in Italy, given regions are responsible for example for healthcare workers, and municipalities for local services such as creche and police. Processes and capacity vary across these governments. The pressure of growing retirements is often greater for regional and local governments, given that in many locations the needed skills are scarce, especially in STEM-related subjects. The central government can issue guidelines and standards towards improving efficiency and quality of personnel management, but implementation remains the purview of regional or local governments, leading to varying performance and holding back efforts to improve efficiency. Identifying and reforming barriers in existing laws and regulations across different subnational governments, such as procedural obstacles to staff moving between different administrations, or inefficiencies in payroll systems, could improve flexibility and help reallocate resources to fill gaps. Both support and incentives from the central government could improve subnational governments’ personnel management, for example through training and exchanges between different personnel management areas, while developing and publicising performance relative to benchmarks and linking these to performance-based grants or earmarked intergovernmental transfers.
Improving procurement efficiency
Procurement of public goods and services, at 12% of GDP in 2023, is a substantial fiscal commitment as in other OECD countries. Improving procurement quality and integrity is important for raising the returns from public investment within existing budgets. The largest share of procurement spending is related to health. Substantial reforms over 2023-2024 have address some of the challenges. Procurements above given thresholds are required to pass through qualified purchasing entities, and more than 60 000 public officials are undergoing special training to professional public purchasing. Still, key issues remain notably the fragmentation of responsibilities across numerous public entities and levels of government, as well as uneven administrative capacity.
The continued progress with e-procurement can partially mitigate these risks (Frigo and Mocetti, 2025[30]). The integration of e-procurement with broader digital government systems has improved the speed, traceability and transparency of procurement procedures, particularly in competitive tenders and in administrations with stronger technical capacity. NRRP measures have helped reinforce the administrative capacity of subnational governments, supporting project delivery. Implementing a competency model and a certification framework—drawing on the European Competency Framework (ProcurCompEU)—would help raise staff capacity. Certification could cover core skills such as knowledge of relevant legislation and regulations, market analysis, needs assessment and the application of policy objectives, including green and socially responsible procurement. Recognising procurement officials as a standalone profession could support the attractiveness of the activity and career progression, and help to overcome salary rates that can lag other civil service workstreams (OECD, 2025[23]). Making greater use of regional procurement centres, as envisaged by the 2023-2024 reforms, could help overcome the stretched human resources in many local authorities.
Sustaining higher public investment rates
Following the NRRP-driven boost to public investment management capacity and spending, the government anticipates maintaining public investment at around 3.5% by 2028, near the average of OECD countries but above Italy’s historical rates. Such rates will be required to maintain existing infrastructure, especially through more extreme weather events due to climate change – for example, between 2010 and 2021, subways and urban trains in major Italian cities were closed for a total of 83 days, while extreme weather conditions disrupted electricity networks for a total of 89 days. In addition, new infrastructure investment will be needed to support changing activities across the economy. A greater share of this investment will need to be financed through domestic resources once the NextGenerationEU facility expires and other EU-financed public investment programmes are completed.
To boost the efficiency of public investment spending, making permanent some of the measures established by the NRRP, such as the bodies that help subnational governments prepare and implement public investments, the simplified and standardised documentation, and stricter monitoring of deadlines for milestones, would be steps in the right direction. While building on the MTFSP to develop the pipeline of projects following the NRRP and improved implementation capacity, projects should be prioritised based on robust assessments of their long-run costs and benefits rather than the expected speed at which funds will be disbursed (Banca d’Italia, 2025[28]). The central government can prepare projects with greater collaboration with subnational governments, especially local governments, even if this slows disbursements. Completing and publishing robust and independent evaluations of projects costs and benefits, especially for larger projects, both before concrete decisions are made and once the projects have been completed, would help ensure that public investment spending is sustainable and supports growth into the long term.
Public concessions, especially in the form of public-private partnerships (PPP) can help finance investments by bringing in private financing and management capacity. However, PPPs involve significant risk for the public sector, ranging from contingent fiscal liabilities and risks around project delivery to capture of regulators, conflict of interest and corruption. The PPP law was reformed in 2023 and 2024, improving transparency and strengthening the role of the Department for Planning and Coordination of Economic Policy in the Presidency of the Council of Ministers, towards helping PPPs contribute to achieving the NRRP goals. Contract templates have been standardised, providing public administrations with a clear and authoritative reference, improving clarity, consistency and the quality. These reforms have been applied in energy, waste, and infrastructure projects. A recent review highlighted the importance of ensuring accurate accounting treatment and robust assessments of fiscal implications in preparing and executing projects. The Court of Auditors and the anti-corruption agencies point to long-standing issues persisting, such as complex processes combined with ineffective monitoring contributing to inadequate risk assessment, underestimated cost, and weak post-award monitoring. Limiting the use of PPPs to cases where they pass OECD guidelines could improve delivery while protecting public finances. These steps include ensuring that all proposed PPP projects undergo careful cost-benefit, risk and public interest assessment and are assessed relative to traditional procurement. Effectively implementing PPPs requires strong institutional capacity and integrity. Despite the strengthened cross-sector Finance Technical Unit, decision-making power regarding PPP proposals rests decentralised to the authority responsible for awarding each contract. Italy could strengthen the decision-making role of its cross-sector PPP unit, in line with the approach in the United Kingdom, France or Korea. There, the central unit ensures PPP decisions are grounded in rigorous and standardised cost-benefit assessments, including reviews of risk transfers.
Strengthening budget processes to improve spending effectiveness
The development in Italy of the MTSFP together with sectoral spending controls, are designed to improve medium-rum management of public spending. They can provide a benchmark that guides priorities over five to seven years, which can improve implementing authorities’ visibility over their resources and enabling them to plan and spend more effectively. In Italy, legislation provides for multi-year expenditure appropriations, but they are not enforced, with projections serving as indicative rather than actual spending limits. The regular revisions within the annual budget process to forecasts and medium-term plans provide for flexibility, but this weakens the effectiveness of the broader medium-term exercise and the predictability of resources. Implementing the legislated medium-term ceilings will become increasingly important as part of delivering the medium-run fiscal plan. Insufficiently detailed ministerial ceilings can lack credibility and avoid strategic choices about spending, potentially undermining investment and quality of public services over time (OECD, 2025[24]). Providing binding ceilings for the budget year plus the two-year forward estimates for components of spending within sectoral aggregates (including some headroom for contingencies) would help better manage spending. In the first instance, this can be at the national government level. As familiarity with binding ceilings develops, extending them to subnational governments’ allocations would further support spending effectiveness, especially given subnational governments large share in Italy’s public spending,
Spending reviews have a growing role in Italy’s annual budget process but could be more ambitious. Each of the 16 central administration bodies is required to review or evaluate at least one major spending project annually. Reports are published. Their primary goal is to increase the quality and efficiency of public spending, with opportunities to cut spending identified in the process, with the goal of reforming at least 1% of total spending annually (Ufficio parlamentare di bilancio, 2025[48]). For example, spending reviews have identified potential savings from purchasing rather than renting properties, aggregating public procurement, or taking a longer-term perspective on purchasing needs. Expanding reviews’ ambition and coverage would help the government achieve its aggregate expenditure growth targets. The Ministry of Finance and Economy leads in the reviews, coordinating with the relevant ministries. Technical capacity is deepening, and reforms underway to public accounting regulations will help evaluate spending and its effectiveness and improve comparability across different agencies. While reviews are finalised early in the budget preparation process, implementation particularly by spending ministries, and monitoring progress on recommendations are ongoing challenges. A transparent scoreboard that communicates implementation of recommendations, linking recommendations to budget allocations and expenditure ceilings, could help improve take-up. Strengthening political will to implement the outcome for reviews is key. Deepening the central government’s engagement with regional and local government on preparing spending reviews, within constitutional boundaries, can help improve the efficiency of subnational spending.
One example of where spending efficiency could be improved is health. Spending per capita is modest and indicators suggest that service quality and coverage, along with users’ satisfaction, could be improved (OECD, 2025[43]). The system remains hospital-centric and costs could be reduced by shifting towards greater use of primary care, ensuring the wider use of diagnostic related groups (DRGs) across the whole system, including in those areas where it is not currently used, and ensuring robust gatekeeping systems for accessing services. The many layers of governance add to costs and inefficiency. Increasing the use of generic drugs towards the rates of some other EU countries would help contain public health expenditures.
1.2.2. Strengthening the revenue base and improving the mix
The revenue to GDP ratio is around 47% of GDP, placing Italy in the top third of OECD countries, and the system is skewed towards social contributions revenues, income tax and production and weighted less to property and capital income (Figure 1.22 and Table 1.8). Given a significant share of activity in the informal sector, non-compliance and extensive tax deductions and allowances, the distribution of the tax burden discourages stronger employment, investment and productivity. Rebalancing tax policies away from those that most penalise employment and investment would allow revenue to be raised in more growth-friendly and fair way. Italy’s tax reforms over recent years have intended to simplify and improve compliance and reduced disincentives for employment and investment. Continuing to improve compliance as has been accelerated by the NRRP, would help. However, extensive use of tax incentives, many of them temporary, add complexity, weaken public finances and risk distorting behaviour (Table 1.7) (discussed further in Chapter 4). The large fiscal adjustment facing Italy, together with slow growth, underline the case for deeper reforms of the tax system.
Further pursuing under-declared activity and reducing tax evasion
Significant scope remains to improve tax collections, building on recent years’ progress. Estimates suggest that evasion and under-declared activity have declined relative to the late 2010s, contributing to revenue gains and the better-than-expected budget performance. The revenue agency recovered EUR 24.7 billion (1.2% of GDP) of undeclared tax payments in 2023, an increase of 22% compared with 2022. Some earlier gains, however, appear to have moderated. Incentives created by generous tax credits—such as the ‘Superbonus’ for housing renovation—to declare transactions end as these schemes are phased out. The authorities estimate that around EUR 100 billion (4.7% of GDP) in tax and social-security contributions were lost to evasion in 2023 (Commissione per la redazione della Relazione sull'economia non osservata e sull'evasione fiscale e contributiva, 2025[12]).
Source: OECD Global revenue statistics.
The NRRP and the MTFSP include measures to improve tax compliance, although the goal in the initial NRRP to reduce tax evasion by 15% compared to 2019 levels was removed in the sixth revision approved in November 2025. Improved collection techniques at the revenue authority have boosted returns. Improved data analytics is allowing the tax authorities to conduct better-targeted controls. Experience across OECD countries, for example in Belgium (De Neve et al., 2021[8]), is that simplifying compliance processes, alongside credible deterrence, can further raise revenues. Simplifying payment processes also helps revenue collection efficiency. Reforms in 2025 and early 2026 to consolidate the legal compliance framework for value added tax are therefore welcome. Pursuing the consolidation of disparate payments, such as integrating regional business taxes into the overall corporate tax payment, as part of a broader reform of taxes on production would reduce compliance burdens for taxpayers. Other reforms include steps in 2024 to enhance the framework for taxpayers to develop cooperative arrangements with authorities, reforms to dispute resolution, and to reduce penalties related to VAT compliance so they are more proportionate. As a next step in supporting taxpayers, compliance processes could be reviewed towards identifying and reforming where they are excessively formalistic and rigorous relative to the administrative and legal needs for achieving compliance.
The 2026 budget includes a significant ‘rottamazione’, or writing-off and rescheduling or reduced payment of overdue tax debts. It allows payments from tax debts worth over EUR 50 000 owed by certain taxpayers to be deferred into monthly instalments over 9 years with a 3% interest rate, allows low-income taxpayers with smaller tax debts to pay a portion of the amount due, and writes-off smaller tax debts and fines dating from the 2000s deemed uneconomic to collect. An online platform was launched in early 2026 to allow taxpayers to request a payment plan or cancellation of tax debts and fines. Even if the tax debt is ultimately paid, these arrangements reduce the cost of the debt for the taxpayer. These measures follow Italy’s long history of fiscal amnesties – at least 80 in 150 years (OECD, 2015[11]). While writing-off, rescheduling or reducing the penalties on tax debts that are costly to collected or highly unlikely to be paid can reduce administrative costs and impediments to winding up defunct activities, as noted in past OECD Economic Surveys of Italy (2019[32]; 2021[22]; 2013[33]), repeated concessions on taxes due undermine tax collection as they can encourage delaying payment and they create inequities between taxpayers. While in other country contexts they may exceptionally generate a one-off boost in revenues, this requires that they are well-targeted, apply to voluntary disclosures and unintentional noncompliance, and are followed by strong enforcement. Future write-offs or concessional repayment of taxes due should be avoided with the focus on developing an environment of institutional integrity and credibility.
Undeclared activity remains a significant challenge for tax collection. Istat estimates that unobserved activity—including both undeclared and illegal activity—amounted to 10.2% of GDP in 2023. Over 3.1 million workers were unregistered in 2023, the equivalent of 13.3% of total registered employment. Ensuring that all workers contribute to the pension and social-security systems is essential for long-term sustainability and for guaranteeing adequate retirement incomes, as well as ensuring a favourable business climate (see in Chapter 4 and (Kosta and Williams, 2020[26]). Undeclared activity is associated with weaker governance and a prevalence of small firms especially in some service sectors and remain higher in southern regions than the North. As well as digitalisation and simplification of administrative procedures and developing routes to regularize activity, Italy has ramped up labour inspections. Innovative initiatives include the use of cultural mediators to inform and support third-country nationals to ensure that their employment arrangements are in order (European Labour Authority, 2023[9]). Further expanding programmes to help firms transition to formality, complemented by assembling fragmented information about non-compliers, for example through accessible public registries, could reinforce progress.
Limiting the scope for non-traceable transactions would help curb undeclared activity, money laundering and related criminal risks. Overall, international tax transparency and anti-monetary laundering measures compare well with peers (Figure 1.23). However, the ceiling for undocumented cash transactions exceeds the limits of several OECD countries with longstanding challenges in revenue collection since it was raised from EUR 2 000 to EUR 5 000 in 2023, (Figure 1.23, Panel C). Under forthcoming EU Anti-Money Laundering Regulations, all Member States will apply a EUR 10 000 limit and require identity verification for cash transactions above EUR 3 000 from 2027. Since 2023, Italian businesses may also request cash payments and refuse electronic payments for transactions below EUR 60. Aligning Italy’s maximum values of transactions in cash with jurisdictions facing similar compliance challenges, and requiring acceptance of electronic payments for purchases above a low threshold, would help reduce incentives for under-declaration and support more effective tax enforcement.
Increasing VAT revenues
VAT on consumption can be an efficient way of raising revenue. While Italy’s headline rate of 22% is broadly in line with many other EU countries, revenue raised compared to consumer spending is relatively low (Figure 1.24, Panel A). This reflects a combination of compliance issues and the extend use of exemptions and lower rates. VAT compliance has improved since the late 2010s but in 2023 VAT revenues were still 15% lower than if compliance was complete. The growth of digital tools, such as electronic invoicing and mandatory e-invoicing, and digital cash registers, as well as the reverse charge mechanism and split payments have supported compliance. Indeed, Italy’s development of electronic tools since the mid-2010s has been a model for other countries. Among recent developments, the Tax Authority has developed the role of AI tools to identify VAT discrepancies, helping to identify risks and target audits. A consolidated VAT law, which is pending final approvals and implementation, provides for greater use of electronic tools for VAT compliance and controls, increasing the transparency of e-invoicing and reporting electronically. It provides a basis for pre-filled VAT returns, which experience in countries such as Poland and Hungary suggest can reduce administrative burdens and improve the accuracy of VAT filings. E-filing, with pre-filled forms, will create stronger incentives for taxpayers to submit accurate information into real-time information systems to avoid disputes with the tax authorities regarding differences in the pre-filled amounts. A pragmatic approach and support especially for smaller enterprises with fewer resources to submit accurate data to the tax authorities will be important if these technologies are to lighten rather than add to compliance burdens. In a welcome rationalisation, a planned law unifies multiple current VAT legislation into one text, aligned with the EU VAT Directive, with the goals of simplifying compliance and increasing legal certainty. Limiting the scope for cash-based transactions would help reduce the compliance gap.
Note: Panel A summarises the overall assessment on the exchange of information in practice from peer reviews by the Global Forum on Transparency and Exchange of Information for Tax Purposes. Peer reviews assess member jurisdictions' ability to ensure the transparency of their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard. The figure shows results from the ongoing second round when available, otherwise first round results are displayed. Panel B shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.
Source: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for Tax Purposes; and OECD, Financial Action Task Force (FATF).
The threshold below which businesses are not required to register and collect VAT is higher in Italy than most OECD countries (Figure 1.24, Panel B). It was increased to EUR 85 000 in 2023, from EUR 65 000, and aligns with the ‘flat tax’ presumptive regime (discussed below). The level of the VAT registration thresholds entails trading off between limiting compliance and administration costs for small businesses and tax authorities, against protecting revenue and avoiding distortions that encourage businesses to stay small or operate as sole traders. The lower thresholds in most countries suggest Italy could reduce its thresholds as VAT compliance processes are simplified. Businesses with revenues below the threshold can register for VAT on a voluntary basis, and Italy does not require these businesses to remain registered for a minimum period (OECD, 2024[13]). Imposing such a minimum period would help avoid fraud risks from operators without a history of economic activity registering, claiming refunds, then disappearing.
1. VRR is a measure of the extent to which a VAT regime collects the VAT given final consumption expenditure. To achieve this, the VRR estimates the difference, if any, between the VAT revenue actually collected under a country’s VAT regime and what would theoretically be raised if VAT was uniformly applied at the standard rate to the entire potential tax base and all revenue was collected.
2. Annual turnover thresholds expressed in USD purchasing power parity. In national currency: Italy values are EUR 85,000 (2024), and EUR 65,000 (2020)
Source: OECD calculations; and OECD Consumption tax trends 2024.
The wide range of goods and services that are exempt or taxed at reduced rates hampers the effectiveness of Italy’s VAT systems and weakens revenues by more than in most other OECD EU countries. Reduced rates add to the complexity of the VAT system, raising costs for businesses and revenue authorities (Highfield et al., 2019[14]). The policy goal of reducing the cost of essential items for those with lower incomes may be better achieved by supporting the incomes of low earners. Further, many of the reduced rates in Italy benefit wealthier or foreign consumers and business owners, such as the lower rates for tourism and hospitality services or for housing construction, or they mainly benefit wealthier consumers who consume more, such as reduced rates for energy. The consolidated VAT legal framework is intended to align and reduce the number of categories of goods and services subject to reduced rates to EU standards, but at the same time Italy has been among the leading countries seeking derogations from these standards, largely for the construction sector (European Commission, 2025[15]). Reviewing the reduced rates, identifying their costs and beneficiaries, towards eliminating those which are most costly and least effective at achieving their public policy goals, would improve the VAT system’s effectiveness and the revenue mix.
Reducing the tax burden on labour
Italy has long placed a relatively high tax and social contribution burden on labour and personal income, which raises employment costs for employers, discouraging employment, and depresses disposable incomes for lower- and middle-income workers. Despite recent years’ reforms the wedge remains among the highest in Europe and across OECD countries for many households, impacting labour costs and competitiveness for both firms and workers (Figure 1.25). To reduce this, the government has progressively adjusted the personal income tax system, reducing rates and expanding exemptions. The 2025 budget made permanent personal income tax changes, reducing the number of tax brackets and simplifying deductions. It estimated these reductions in personal income tax at the equivalent of 0.7% of GDP. The 2026 budget includes a cut in the personal income tax rate from 35% to 33% for incomes between EUR 28 000 and EUR 50 000 (the average salary was EUR 35 616 in 2024). The Parliamentary Budget Office estimates that this will reduce revenues by EUR 3 billion (0.1% of GDP), with 43% of this amount accruing to the relatively small share of taxpayers reporting incomes above EUR 50 000. The adjustment helps offset for many taxpayers some of the effects of non-indexation of income tax thresholds, which moves more wage earners into higher tax brackets when wage rates increase, although this effect of rising wage rates has unwound some of the effects of earlier reforms at some wage rates (Figure 1.25).
Most of the high labour income tax wedge is due to compulsory social security contributions. There are around 33% to 40% of the gross salary depending on wage rates, made up of a contribution of around 10% of the wage rate by employees and the remainder by employers. Social security contributions are largely applied to finance the pension system and help stabilise workers’ lifetime incomes. A temporary measure in 2024 reduced the social security contribution rate for dependent workers by 6 to 7 percentage points. These high contributions rates impose high effective and marginal tax rates, including on low earners, and social security contribution rates are not progressive, notwithstanding the reduced overall tax and contribution wedge through reduced income tax rates at low incomes. High marginal rates on low earners provide incentives for undeclared work, although social security contributions can be easier to collect in some cases than income taxes.
Income tax and social contributions less cash benefits, by household type and wage level, for Italy in year indicated, and 2024 for OECD and EU22 average
Note: Wage levels are expressed in % of average wage. Married 100-0% are single earner, other married couples are two earners.
Source: OECD Taxing Wages 2025, 2020 editions table 3.1 and OECD calculations).
Consideration should be given to further reforms to reduce high social contribution rates. Efforts to reduce the cost of pensions would help create space to reduce the burden. Italy’s social fund (INPS) is not self-financing, with approximately 40% of its revenues already funded through general taxation. A reform that reduced social contributions, funded through increased collections of other taxes, would create a more progressive structure relative to wage rates while broadening the tax base. In this context, strict rules to define the extent that INPS can draw on general taxation revenue to finance its pension and other benefit payments would help to maintain some discipline in spending. Extending social security contributions paid by employees at the 10% rate to pensions would further help to raise revenues.
In the medium term, indexing the personal income tax rate brackets, credits, deductions and other allowance eligibility thresholds to consumer price inflation would limit bracket creep and counter the rise in the tax wedge with wage growth, especially among lower- and middle-income workers. Analysis by the Parliamentary Budget Office indicates that the reforms to improve the income tax system’s progressivity have also made it more sensitive to inflation (Ufficio parlamentare di bilancio, 2025[48]). Eighteen OECD countries have automatic indexation mechanisms in place, making their tax systems more predictable, less administratively burdensome, and fairer over time. Most of these countries index these thresholds to CPI inflation, in some cases modified to exclude certain items such as tobacco. Some countries include the effects of productivity growth in the calculation towards limiting bracket creep as wages grow with general productivity improvements, for example by adding an adjustment to inflation or by referencing the average or the minimum wage rate (OECD, 2023[17]).
Various personal income tax exemptions and reduced rates distort how workers’ pay packages are structured and the effective tax rate between equivalent workers. These tax expenditures have been expanded in recent years. They include reduced rates on overtime, ‘productivity bonuses’ of up to EUR 3000 for incomes below EUR 80 000, and tax exemptions on fringe benefits of EUR 1000 rising up to EUR 5000 for some workers in certain situations, the revenue cost of which is estimated at up to EUR 3.5 billion (0.2% of GDP) (Ufficio parlamentare di bilancio, 2025[48]). The 2026 budget introduced a flat tax rate of 5% for salary increases linked to contract renewals signed between 2024 and 2026 for workers earning less than EUR 33 000, and a rate of 15% for the additional allowances for non-managerial public sector workers with incomes below EUR 50 000. Removing such reduced rates and exemptions would allow for a simpler, more transparent personal income tax system, increasing revenues and allowing overall rates to be lowered.
The high labour income tax wedge and advantageous arrangements for self-employment income creates incentives to work as self-employed, rather than as an employee. Self-employment is more common in Italy than in most OECD countries, contributing to a large share of small, typically low-productivity firms (discussed in Chapter 4). Self-employment income generates an usually large share of the highest-income individuals’ income mix (Figure 1.27). Compliance among the self-employed is a long-standing challenge. Their tax and social contribution payments were estimated to be 40% of the amount due in 2023 (Commissione per la redazione della Relazione sull'economia non osservata e sull'evasione fiscale e contributiva, 2025[12]). To encourage declarations among self-employed and freelancers, a simplified ‘flat tax’ regime with a reduced income tax rate of 15% and of 5% during their first 5 years operating is available if they earn less than EUR 85 000 plus allowances for certain costs. This eligibility threshold is similar to that in other OECD countries near Italy’s income level (Mas-Montserrat et al., 2023[19]). Italy’s presumptive tax regime is unusual in its focus on the self-employed, even though certain professionals are in a position to comply with the standard income tax regime. A ‘flat tax’ regime requires balancing the stronger incentive to declare income, especially among small-scale taxpayers, with its effects of weakening the revenue base and encouraging workers to operate as self-employed rather than employees. Reducing the threshold for the ‘flat tax’ regime and reducing the periods a taxpayer can remain eligible for the regime would encourage participants to shift into the standard tax regime. Broader reforms to reduce the combined social security and income tax burden on lower earners and reduce regional production-based taxes would also help.
Lower effective taxation of some sources of capital income compared with labour income distorts how entrepreneurs structure their businesses and encourages drawing income through dividends or capital gains rather than as wages (Zawisza et al., 2024[41]). This can reduce the equity, efficiency and revenue potential of tax systems. The gap between the effective tax rate on labour and capital is significant. Various categories of business income amount to over half of the income of individuals earning in the top 1% of incomes in Italy (Figure 1.26, (Guzzardi et al., 2023[20]). The interaction between capital income and labour income taxation is complex, and reforms can bring risks of creating new arbitrage opportunities or distortions to business decisions. A first step would be to identify and address the more harmful and costly arbitrage opportunities. Reducing incentives for tax arbitrage by narrowing the gap between effective labour and capital income taxation rates would enhance the tax system’s progressivity and efficiency.
Shifting to taxing immovable property and other assets
Increasing taxes on property and other assets would allow the tax on labour to be lowered, improving work incentives and shifting the burden from the less wealthy. Real property tax revenues weigh less on investment, employment and activity than other taxes, and so increasing their role in the overall tax system can support fiscal sustainability while limiting the economic drag. While revenues from property taxes as a share of GDP are above the OECD and EU averages, recurrent property taxes remain relatively modest sources of revenue in Italy, raising less than 1.5% of GDP (around the OECD average). The cadastral value provides the taxable base for recurrent property taxes, as well the inheritance tax liability on real estate. Legacy cadastre values are half or less of current market values and as many as one million properties are not registered, weakening property tax collection and other public functions like urban planning. Updating property cadastre values (discussed in the (2024[17]) Economic Survey of Italy) is slowly advancing and is among the priorities in the MTFSP. The requirements that owners of properties that benefited from the ‘Superbonus’ and other public renovation subsidies update their registered cadastral value is leading to welcome progress, but applies to about 4.2% of the building stock. Streamlining and digitalising cadastre value documents and property tax reporting will start contributing to property tax receipts from 2026. Updating cadastre values should raise additional revenue and would provide a basis to review rates. Concerns over the distributional effects or difficulty for households with a high asset value but low incomes could be addressed, for example by allowing property tax liabilities, adjusted for inflation, to be met when the property’s title is transacted (for example through inheritance or sale) if the owner’s income falls below a threshold, as is done in OECD countries ranging from Ireland and Denmark to some US states and Canadian provinces (OECD, 2022[23]).
Composition of gross household incomes – by percentiles of income earners
Note: Data on the composition of gross household incomes were available for Austria, Belgium, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, and Spain. Households with negative income were removed. Categories of income are defined as follows: employee income is total remuneration received from an employer in cash; self-employment income refers to the net operating profit or loss earned by a self-employed person from their unincorporated enterprise; rental income is rental income received net of costs such as mortgage interest repayments and maintenance; financial income refers to interest and dividends from publicly traded companies, interest from assets such as bank accounts or bonds, and any income from private businesses not derived from self-employment; income from pensions refers to income from public and private pension sources; regular social transfers includes transfers such as unemployment benefits, illness subsidies, maternity leave, and child benefits; regular private transfers comprises regular payments from private entities and/or other households, including child support; other income captures remaining income such as capital gains or losses from the sale of assets, severance payments, insurance settlements, etc. although this information is missing for some countries and may be underestimated for some households. As the tails of a distribution are typically under-represented in survey data, the composition of top 1% income earners may be less reliable than for the lower 90% of the income distribution.
Source: European Central Bank, Eurosystem Household Finance and Consumption Survey Wave 2017
The 2026 budget increases the flat tax imposed on income generated outside Italy by wealthy foreigners who move to Italy or Italians who return to EUR 300 000 annually for those who enter the scheme from 2026, while retaining the EUR 200 000 rate for those already in the scheme. In 2023 the regime applied to over 1500 individual taxpayers, although many of these are members of the family of the principal payer, so are charged a reduced amount. There are no investment or other obligations for those who participate in the scheme. As described by the Court of Auditors, revenue authorities do not collect data on foreign income and so cannot assess the potential liabilities if the taxpayer had been taxed under the standard regime, nor are able to assess any boost to economic activity and tax revenues from high wealth individuals relocating to Italy. Indeed, the experience across OECD countries is not clear whether such policies yield broader economic benefits (OECD, 2024[16]).
Difference in integrated effective tax rates at total labour cost or shareholder profits five times the average wage
Note: Figure illustrates the difference between the integrated effective tax rate (ETR) on wage income and the integrated ETR on dividend income in the scenario of total labour cost or shareholder profits are five times the average wage, showing the difference in percentage points. Positive values indicate the effective tax burden on wages is higher than on dividends. Integrated effective tax rates are calculated per the methodology discussed in Annex A of (Hourani et al., 2023[18]). Data can be accessed at oe.cd/taxation-labour-capital
Source: (Hourani et al., 2023[18]).
Boosting other sources of revenue
Italy has extended the use of windfall taxation. For example, a windfall tax was imposed on energy companies’ increased profits during the 2022 surge in European energy prices. In 2023, a windfall tax of 40% tax of banks’ profits was applied following the increase in interest margins over 2021 to 2023. Following sharp drops in banks’ share prices after the announcement (De Vito et al., 2023[2]), the plan was reformed and the value of the tax was capped at 0.1% of banks’ assets. This was initially expected to raise of EUR 5 billion (0.2% of GDP). The windfall tax on banks was criticised for generating uncertainty for investors and banks through its rapid introduction and amendment, and in distorting banks’ investment decisions and behaviour, detracting from their willingness to lend. The 2026 budget provides for an additional EUR 11 billion in tax revenues from the financial sector over 2026-2027 from banks and insurance companies by increasing a regional tax on the value of production and freezing the use of deferred tax assets to reduce tax liabilities. To maintain profit margins banks may expand their interest rate spreads. In general, when well structured, such windfall taxes may not significantly deter long-term investment, if they apply retrospectively to past profits and are not permanent corporate income tax increase. The experience across OECD countries is that even when windfall taxes can be designed to not distort investment and other operating decisions, they should be temporary and linked to specific, transitory crisis situations, rather than be used to address ongoing revenue needs, which should be met through the standard tax system.
Improving the management of various fees and charges for access to public goods and services would generate additional revenues, encourage greater economic returns from these public assets and improve the competitiveness of various sectors in Italy. Assessments by the Court of Auditors find concession fees are far below market values based on businesses’ turnover. Beach concessions have attracted much attention, with the 12 000 concessionaires paying on average EUR 8333 annually, while the sector’s annual turnover is estimated at EUR 2.1 billion. Legal steps to review and retender existing tenders have been delayed until 2027.
Note: Panel C, children are exempt in Hungary, Lithuania, Poland, Portugal, Slovenia, Switzerland. Belgium: refers to the Brussels-Capital Region. Switzerland: refers to the canton of Zurich.
Source: OECD (2021), Inheritance Taxation in OECD Countries, OECD Tax Policy Studies, No. 28, OECD Publishing, Paris, https://doi.org/10.1787/e2879a7d-en.
Similarly, the income received by the State from motorway concessions is a small fraction of the revenues generated by operators (for example (l’Italia, 2025[37])). The 2021-2022 and 2024 introduced national regulations regarding concessions on large hydroelectric projects and motorways towards improving their services and revenues for the state. Concessions for energy, water and other utilities are administered by subnational governments with varying fees and arrangements that may no longer reflect market conditions. Removing the right of pre-emption and opening tenders for concessions to competitive bidding, monitored by competition authorities, can increase public revenues and make better use of public assets. Tender auctions can be designed to allocate concessions to operators that both limit costs for users of the assets, improve the quality and sustainability of services, and raise the state’s income.
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