## _cr01207

## Source details

**Canonical URL:** [_cr01207](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2001/_cr01207.pdf)

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### Near-Term Economic Outlook
- The staff’s baseline projection envisages GDP growth of 1.8 percent in 2001 and 1.4 percent in 2002.
- These projections are subject to major uncertainties, notably the unfolding fallout from the September attacks.
- Downside risks:
  - Confidence could deteriorate sharply, lowering domestic demand—especially for investment and consumer durables.
  - External demand could weaken more than currently anticipated.
- Upside possibilities:
  - Monetary easing and lower oil prices could trigger a more robust recovery.
- The pace of recovery in 2002 depends importantly on the investment effect of temporary tax relief under the “Tremonti-bis” law; this impact would become more precarious if uncertainty and weak business sentiment persist.
- Over the summer and into October, a further weakening was evident in most external and domestic indicators; clearer signs of a slowdown had emerged and risks of protracted weakness had risen after the September attacks.

### Tremonti-bis investment incentive (as described in the source)
- Provides temporary, broad-based investment incentives:
  - 50 percent of investment in 2001 and 2002 in excess of average investment during the previous five years is deductible from corporate income taxes.
- The law covers all firms and independent workers, and it applies also to investment in training and professional development.

### Fiscal outcomes and pressures
- In 2000:
  - The general government deficit met the targeted 1.5 percent of GDP.
  - Public debt declined in relation to GDP to 110 percent.
- For 2001:
  - Achieving the deficit target of 0.8 percent will be difficult in light of sizable expenditure overruns, especially on health care expenditures and wages.
  - Nominal revenues are expected to meet budget targets, reflecting improved tax administration and buoyant direct tax revenues.
- Staff advice during the October visit:
  - Let fiscal stabilizers operate on the revenue side.
  - Proceed urgently with structural reforms, particularly in public spending, to avoid fiscal consolidation jeopardizing planned tax cuts.

### Labor market and structural challenges
- Italy faces a decade-long lackluster growth that the new administration’s program aims to revive via:
  - A sizable cutback in the public sector.
  - Tax reform.
  - Progress in the product and labor markets.
  - Infrastructure improvements.
- Achieving the growth goal implies, among other things:
  - Narrowing wide regional imbalances.
  - A substantial increase in Italy’s still-low employment level.
  - An effective approach to fiscal pressures from high public debt and a rapidly aging population.
- Demographic and regional imbalances in the labor market remain pervasive, with unemployment much higher in the South and among women and the young.

### Executive Board Assessment
- Directors commended the authorities for:
  - Achieving macroeconomic stability.
  - Containing inflation.
  - Reducing unemployment.
  - Lowering public debt.
  - Moving structural reforms forward in a number of areas.
- Directors noted major remaining challenges:
  - Italy’s recent growth performance was among the weakest for industrial countries.
  - Major fiscal and structural challenges remain.
- Directors welcomed authorities’ intention to undertake reforms to reinvigorate growth and strengthen public finances.
- Specific recommendations and emphases by Directors:
  - Reduce the tax burden, especially the tax wedge on labor.
  - Mitigate the fiscal impact of population aging.
  - Further improve labor and product market performance.
  - Implement the reform agenda quickly and decisively, while several Directors underlined the desirability of building a broad consensus, especially in the current unsettled environment.
- On monetary and external conditions:
  - Directors considered the near-term outlook fraught with uncertainty given the global slowdown.
  - Notwithstanding recent monetary easing by the European Central Bank, Directors viewed monetary conditions as remaining somewhat tight from a purely domestic perspective, noting Italy’s large output gap and abating inflationary pressures.
  - External competitiveness was considered broadly satisfactory at present.
- On fiscal performance in 2001:
  - Directors viewed favorably the reduction in the budget deficit in 2001, despite weaker than expected real growth, although they regretted that primary expenditure had again exceeded planned limits.

*Source: _cr01207 (IMF staff report excerpt).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2001/_cr01207.pdf_