Italy: Reforms Needed For Stronger Growth and Stability

IMF News, July 27, 2017

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Italy has started to grow again in recent years, but the recovery has been too weak to claw back ground lost from subpar growth that started well before the global financial crisis.
Average Italians still earn less than two decades ago; take-home pay dipped during the crisis and has not yet caught up with growth in key euro area countries.
On current projections, it could take nearly a decade for wages to return to their 2007 levels—during a period when euro area partners are expected to pull even further ahead.
The growth slowdown and crisis burden have fallen disproportionately on the working age population and younger generations:
- Unemployment, including among the young, is very high.
- Incomes and wealth of the working age population have declined below 1995 levels, in contrast to older households and pensioners.

Wages have generally grown faster than output produced per worker over the past two decades.
Italy has experienced the largest increase in the cost of producing a unit of output in manufacturing compared with peers such as Germany, France, and Spain.
Higher production costs have adversely affected job creation, investment, and production.
In the decade before the global financial crisis, spending grew faster than income, in important part because of increases in pensions.
Since the crisis, spending containment relied mainly on freezing wages and hiring in the public sector, and by cutting public investment, but pre-crisis spending excesses have not been reversed.
The tax burden is heavy, about three-fourths of which is directed toward wages, pensions, and health spending, as well as interest on public debt—leaving too little for public investment and protection of the most vulnerable.
The quality of public services remains relatively poor.
Public debt is very high and, despite recent efforts, Italy has not started to reduce it.

Aligning wages with output produced per worker at the firm level instead of national level would result in an almost 4 percent increase in the number of people employed.
Decisive implementation of a comprehensive package of reforms can raise Italian incomes by over 10 percent, create jobs, improve competitiveness, and substantially lower public debt in the next decade.

Improve wage bargaining by aligning wages with firm-level productivity.
Complement wage-bargaining reforms with government measures to magnify impact:
- Improve competition in product and service markets (for example, professional services, retail, and local public services).
- Accelerate the cleanup of bank balance sheets.
- Enhance the effectiveness of the public sector and civil justice system.
Implement a better fiscal mix that supports growth while reducing debt, including:
- More public investment.
- Better targeting of resources to the most vulnerable.
- Lower pension spending (currently the second highest in the euro area).
- Lower tax rates on labor, and bringing more enterprises and persons into the tax net.

Source: Italy: Reforms Needed For Stronger Growth and Stability (IMF Country Focus, July 27, 2017).