IMF: Italy's debt high, withdraw inefficient anti-crisis measures

The Italian economy recovered well from the pandemic and energy shocks, thanks to tourism and supportive policies. While contributing to the recovery, expansionary fiscal policy has kept the deficit and public debt at very high levels, increasing risks for Italy and acting as a brake on private investment. This is the view of the International Monetary Fund in its report at the end of its mission to Italy, as required by Article IV of the organisation's statute.

Italy's GDP growth is expected to slow down in the coming years, while inflation continues to decline. After +0.9 per cent in 2023, GDP is expected to rise by 0.7 per cent in 2024 and 2025, with Pnrr spending largely offsetting the end of residential investment supported by the Superbonus. A subsequent temporary slowdown in growth could thus be expected in 2026 and 2027, with the completion of the Pnrr. Then, the growth should return to its potential. Inflation is expected to decline to an average of 1.7 per cent in 2024, before returning to the target of 2 per cent in 2025.

"Although it has contributed to the recovery, expansionary fiscal policy has kept the deficit and debt very high, raising Italy's risk premium," weighing on private sector investment, says the IMF. "It is possible to achieve a faster-than-expected fiscal adjustment to reduce debt with a high level of confidence and limited cost to growth by withdrawing inefficient and temporary crisis measures," the Fund highlights.

Italy should replace the tax wedge cut with measures to permanently increase labour productivity and raise the retirement age. "Substantial savings are possible and desirable to finance growth- and efficiency-enhancing measures, including: replacing tax wedge cuts and hiring subsidies with measures that permanently increase labour productivity; and further rationalising pension spending, raising the effective retirement age and avoiding costly early retirement schemes," the IMF says.

Italy should aim for tax simplification and progressivity of the system; it should also improve its supervision of tax credits by requiring 'explicit' ex ante authorisation. This is what the International Monetary Fund emphasises. Significant savings are possible and desirable in Italy to finance measures that foster growth and efficiency through measures such as rationalising 'tax expenditures to broaden the base, increase progressivity, and reduce complexity' and improving the 'control and supervision of tax credits - including in the context of NRP credits for green and digital investments - by requiring explicit ex ante authorisation, monitoring their use in real time, and cancelling tax credits in the absence of full ex-post compliance with programme objectives'.