Over the two-year period 2024–2025, GDP growth will gradually increase from +0.7 percent to +1.2 percent. The OECD issues these slowdown forecasts in its estimates for late November 2023. Public debt should follow an upward trajectory, limiting the room for fiscal policy maneuvers. Therefore, Italy needs to “stably consolidate public finances starting in 2025 to bring debt back to a more prudent path,” according to the international organization as ItaliaOggi reports.
Italy’s overall inflation will gradually decline from 5.9 percent in 2023 to 2.6 percent in 2024 and 2.3 percent in 2025, in line with core inflation, which is forecast to reach 2.5 percent in 2025.
Economic growth slows down
The Italian economy has weathered recent crises well; however, growth is currently slowing amid tightening financial conditions. Public debt is among the highest in the OECD, limiting the room to continue with an expansionary fiscal policy. In light of the strong fiscal pressures associated with an aging population, debt service costs, and the impending climate transition, tax and spending reforms are needed to bring public debt onto a more prudent trajectory.
The ambitious package of structural reforms and public investment envisioned in the National Recovery and Resilience Plan (NRPR) represents a great opportunity to revive growth and make budget pressures more manageable. This will require consolidating and expanding recent wide-ranging reforms in the areas of civil justice, public administration, and competition, equipping the workforce with the skills needed to succeed in the digital and green transition, and increasing labor market participation, especially by women. In detail, the OECD argues that “economic growth faces headwinds from low productivity growth and a rapidly aging population.” Productivity growth, which has stagnated over the past decade, could be reinvigorated by strengthening competition in the service sector, continuing to boost tertiary education, and rapidly implementing the public investment projects envisioned in the NRPR. Participation of more women in the labor market and strengthening work incentives for benefit recipients would support employment growth in the face of the decreasing working-age population.
Pensions: introduce solidarity contribution on golden ones
Restoring Italy’s public accounts will require measures to limit the growth of public spending and improve its efficiency in the years ahead. The OECD therefore recommends that Italy “introduce a solidarity contribution on high pensions not related to high contributions paid.” In addition, Italy needs to make the budget savings targets of upcoming spending reviews more ambitious.
Tax: Italy to shift taxes from labor to homes and inheritances
“Shift taxation from labor to real estate and inheritances, while ensuring that revenues are maintained or increased.” This is one of the OECD’s recommendations to Italy, which also needs to update the parameters for calculations of the property tax base, taking into account distributional impacts. Of total tax revenues, the share of labor taxes is higher than in other OECD countries, while VAT collected and inheritance taxes are lower. Tax evasion results in the loss of a large share of revenue. Costly tax breaks erode the income tax. The OECD also recommends that Italy “continue actions to combat tax evasion, also by continuing to promote the use of digital payments and reversing the increase in the ceiling for cash transactions; phase out costly tax breaks that lack economic or distributional justification, for example by limiting the coverage of the dependent spouse deduction.”