Tax and spending reforms are necessary in the country where the public debt is 140% of the gross domestic product, states a new report from the OECD.
ADVERTISEMENTTightening the belt is one of the key measures to uphold long-term growth in Italy, stated the Organisation for Economic Cooperation and Development (OECD) in their Economic Survey of Italy that takes a close look at the country's prospects.
The report acknowledges that Italy's economy has weathered recent crises successfully but warns it is now slowing amid tightening financial conditions. To secure strong and sustainable growth over the long term, the OECD is recommending that Italy should adopt a shift in taxes, tackling property and consumption instead of labour, as well as carrying out reforms to the pension system and supporting the employment of young people and women, among others.
Italian economy - the challenges
As Euronews Business reported earlier, Europe’s third-biggest economy is facing a vast amount of challenges, including low employment and public finances being in precarious conditions.
The country did well straight after the Covid-19 pandemic, with large fiscal support having helped GDP to rebound to its pre-pandemic level by mid-2021, with unemployment reaching historically low levels.
The fiscal support cannot, however, sustain growth indefinitely.
In its latest forecast, the Bank of Italy estimated gross domestic product (GDP) will slow down further in 2024, down to 0.6% from 0.7% in 2023.
It is forecasting a slightly higher GDP growth of 0.7% for 2024, and 1.2% in 2025.
One of the key drivers of this growth is expected to be internal demand, mainly private consumption. The rate of inflation could support this, according to the OECD. Headline inflation (including food and energy prices) is expected to slow down dramatically, from 5.9% in 2023 to 2.6% and 2.3% in 2024 and 2025 respectively.
Public investment has also shown signs of picking up and is expected to continue supporting the economy in the coming years, the OECD report said.
However, long-term growth could be hindered by the increasing costs of the country's high public debt, stretching to about 140% of GDP, the third highest in the OECD.
Without changing course, public spending on ageing-related and debt servicing costs as a share of GDP is expected to increase by about 4.5% between 2023 and 2040. Tax and spending reforms are needed to help put debt on a more prudent path, the report warned.
What the OECD recommends
The OCED believes future Italian budgets, starting from 2025, need to maintain a careful balance between cutting back on spending which does not tackle long-term growth and putting debt on a more prudent path. "Growth in spending needs to be contained, but at the same time, public investment should be protected to minimise negative side-effects on growth," the report states.
To reduce long-term costs, the OECD recommends reforming the pension system, especially to reduce spending pressures from high-income pensioners and cuts in administrative costs. It also recommends adopting reforms to improve the quality of public services.
On the revenue side, shifting taxes from labour to property and consumption would protect tax revenues, while making the system more growth-friendly.
The report praises ongoing civil justice and public administration reforms, stating they will help raise business investment and productivity. However, it advises reducing regulatory barriers further to help new businesses enter the market and boost competition.
There is more to do to boost employment
Employment has been steadily rising in the country due to high youth unemployment and low female labour market participation. The OECD believes more could be done to improve the numbers.
The remedies, according to the OECD are education and training, as well as expanding access to public early childhood education and incentivising parental leave.
The green transition has slowed in the country
Italy's abundant solar resources and its economy's low energy intensity opened up the path to achieving the climate transition. However, the pace of emissions reduction has slowed over the past decade, said the OECD, urging additional policy efforts to accelerate the reduction of emissions. It recommends raising fossil fuel excise taxes and simplifying installing renewable energy capacities.
ADVERTISEMENT"Transport could be further decarbonised by investing in the railway network, and promoting electric vehicles," it added.
