22/01/2024 - Italy’s economy has weathered recent crises successfully but is now slowing amid tightening financial conditions. To secure strong and sustainable growth over the long term, Italy should focus policy action on improving the business environment and competition, strengthening public finances and promoting the green transition.
The latest OECD Economic Survey of Italy projects economic growth of 0.7% this year after 0.7% in 2023 and 1.2% in 2025. Headline inflation is expected to decline gradually from 5.9% in 2023 to 2.6% in 2024 and 2.3% in 2025, in line with core inflation that is projected to reach 2.5% in 2025. Public investment has started to pick up and is expected to continue supporting the economy in the coming years.
Public debt, at about 140% of GDP, is the third highest in the OECD. Public spending on ageing-related and debt servicing costs as a share of GDP is expected to increase by about 4.5 percentage points between 2023 and 2040. Tax and spending reforms are needed to help put debt on a more prudent path. Steady fiscal consolidation over several years is the key priority for fiscal policy to durably lower public debt, starting from 2025. Growth in spending needs to be contained, but at the same time public investment should be protected to minimise negative side-effects on growth.
Reforms to the pension system are needed, especially to reduce spending pressures from high-income pensioners. Further increases in administrative efficiency to create cost savings alongside implementation of reforms to improve the quality of public services are needed through further digitalising public administration and procurement systems. The ongoing spending reviews should be more ambitious. On the revenue side, shifting taxes from labour to property and consumption would protect tax revenues, while making the system more growth-friendly.
Productivity growth needs to be restored after stagnating over the past decade to support long-term growth. The ongoing civil justice and public administration reforms will help raise business investment and productivity and speed up the implementation of public investment plans by increasing the efficiency of the justice system. Regulatory barriers to competition in services should be reduced to facilitate market entry by new businesses and increase competition.
Raising employment is key to make growth more beneficial for everyone. The employment rate is among the lowest in the OECD due to high youth unemployment and low female labour market participation. Strengthening technical education and the training system would bring more youth and vulnerable people into the labour market. Female labour market participation needs to be raised by expanding access to public early childhood education. Measures to further incentivise paternity leave, including by introducing a “father quota” in the shared parental leave entitlement, would also help.
The economy’s low energy intensity and abundant solar resources make Italy well placed to achieve the climate transition, but the pace of emissions reduction has slowed over the past decade. Additional policy efforts are needed to accelerate the reduction of emissions and adapt to climate change: fossil fuel excise taxes should be raised where possible and more closely aligned with fossil fuel emissions content as in recent plans. Complex permitting procedures that hold back the installation of renewable energy capacity need to be simplified to reach annual installation targets. Transport could be further decarbonised by investing in the railway network, reducing the favourable tax treatment of diesel over gasoline and promoting electric vehicles including through a greater number of charging stations.
See an Overview of the Economic Survey of Italy with key findings and charts (this link can be used in media articles).
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