By Gavin Jones
ROME (Reuters) - The International Monetary Fund on Wednesday criticised Italy's plans to lower the retirement age, saying they would cut the country's growth potential and add to an already high pension bill.
In a report following its annual Article IV meetings with Italian authorities, the IMF also criticised aspects of the new income support scheme which is the government's other flagship reform, though it backed the thrust of the measure.
IMF directors "underscored the need to protect the poor by means of a modern guaranteed minimum income program, reduce current spending, avoid reversing past pension reforms, and raise public investment," the report said.
The fund confirmed its forecast issued last month that the euro zone's third largest economy would grow just 0.6 percent this year, rising to 0.9 percent in 2020, with risks which are "significant and to the downside."
Many economists now expect Italian growth to be even lower this year, after the economy contracted in the last two quarters of 2018, and indicators of manufacturing and services activity deteriorated further in January.
Italy's budget watchdog, the Parliamentary Budget Office, said on Wednesday that growth would "not exceed 0.4 percent."
Cutting the retirement age as planned by the anti-establishment 5-Star Movement and the right-wing League will "lower labour force participation and potential growth, and add to an already high pension bill," the IMF said.
The Italian state already spends more on pensions as a proportion of GDP than any other euro zone country except Greece, according to Eurostat data.
Under the reform, people will be able to retire at 62 years of age provided they have accumulated 38 years of pension contributions, compared with a previous statutory retirement age of almost 67.
Turning to the "citizens' income" poverty relief scheme championed by 5-Star, the IMF welcomed the focus on protecting the poor and strengthening welfare, but highlighted design flaws including benefits that are too high for single people.
These are set at 100 percent of the relative poverty line for tenants without income, compared to international good practice of 40–70 percent, the IMF said.
On the other hand, "benefits decline too quickly with family size (penalizing poor larger families), while pensioners are treated preferentially," it said.
The IMF welcomed recent government measures to tackle corruption and reiterated its usual policy prescriptions for Italy, including decentralising wage bargaining, liberalising the service sector, cutting spending while increasing public investments and lowering taxes on labour.
It also called for lower dismissal costs for firms and a reduction in the number of small banks through mergers.
(Reporting by Gavin Jones; Editing by Toby Chopra)