## Italy: Staff Concluding Statement of the 2020 Article IV Mission

_IMF News, January 29, 2020_

## Source details

**Canonical URL:** [Italy: Staff Concluding Statement of the 2020 Article IV Mission](https://www.imf.org/en/news/articles/2020/01/29/italy-staff-concluding-statement-of-the-2019-article-iv-mission)

## Other formats

- [Markdown version](/en/news/articles/2020/01/29/italy-staff-concluding-statement-of-the-2019-article-iv-mission/index.md)
- [Structured JSON version](/en/news/articles/2020/01/29/italy-staff-concluding-statement-of-the-2019-article-iv-mission/index.json)
- [Bundle manifest](/en/news/articles/2020/01/29/italy-staff-concluding-statement-of-the-2019-article-iv-mission/bundle-manifest.json)

## Bibliographic details
- Published: January 29, 2020

---

### Fiscal policy and market sentiment in 2019
- Fiscal policy implementation in 2019 was better than expected and contributed to improving market sentiment.
- Constructive engagement with the European Commission helped avoid the launch of the EU’s Excessive Deficit Procedure.
- Budget execution was prudent even as new social programs were launched (the “Quota 100” early retirement rule and the citizenship income program).
- Revenue collection was higher than expected.
- The new government’s pro-EU stance and accommodative ECB policy helped reduce sovereign yields to near historical lows.

### Economic situation and outlook
- Current conditions:
  - Real GDP growth in 2019 is estimated at 0.2 percent, down from a 10-year high of 1.7 percent in 2017.
  - Real personal incomes remain about 7 percent below the pre-crisis (2007) peak.
  - Unemployment is high at close to 10 percent, with much higher rates in the South and among the youth.
  - Female workforce participation is the lowest in the EU.
- Projections and risks:
  - Real GDP growth is forecast at ½ percent in 2020 and 0.6-0.7 percent thereafter.
  - These forecasts are the lowest in the EU, reflecting weak potential growth.
  - Downside shocks (escalating trade tensions, slowdown in key trading partners, geopolitical events) could lead to a much weaker outlook.

### Priority: comprehensive reforms to raise growth and resilience
- Overarching objectives:
  - Use current low interest rates as a window of opportunity.
  - (i) Structural reforms to address barriers to competition, rigid wage bargaining, and public sector and judicial inefficiencies.
  - (ii) Credible medium-term fiscal consolidation to lower public debt, underpinned by measures to support growth, protect the poor, and combat climate change.
  - (iii) Strengthening banking system stability by bolstering capital in weak banks and improving profitability and asset quality.

### Structural reforms to raise growth and create jobs
- Expected gains:
  - Reforms to liberalize markets and decentralize wage bargaining are estimated to yield real income gains of about 6-7 percent of GDP over a decade.
- Product and service markets:
  - Lower regulatory barriers in professional services, retail, and local services.
  - Facilitate entry into high-markup sectors, remove exit barriers, and lift impediments to firm growth.
  - Implement legislated pro-competition measures (e.g., liberalization of energy tariffs) and strengthen the competition authority’s enforcement powers.
- Labor markets:
  - Wages remain high relative to productivity; realigning wages with productivity at the firm level would encourage investment and job creation.
  - Modernize wage bargaining, ideally giving primacy to firm-level contracts; consider a statutory minimum wage accounting for regional productivity and living cost differences.
  - Well-designed reductions in the tax wedge on secondary earners, combined with increased child- and elderly-care services, could raise female workforce participation and reduce gender gaps.
- Complementary reforms:
  - Resolve uncertainty over the procurement code and rationalize local state-owned enterprises while safeguarding efficiency and transparency.
  - Timely implementation of insolvency reform and streamlining of civil procedures; fold the special insolvency regime for large enterprises into the general framework.
  - Improve higher education and skill acquisition.

### Fiscal policies to safeguard sustainability and promote inclusive growth
- 2020 budget stance:
  - The government’s fiscal plan is modestly expansionary in 2020 and neutral thereafter.
  - Key measures: postponing VAT hikes, a modestly lower labor tax wedge, combating tax evasion, incentives for private investment, and higher public investment including the Green New Deal.
  - IMF projection: overall deficit around 2.4 percent of GDP in 2020, after which it declines marginally (based on lower nominal growth assumptions than the authorities and excluding future VAT safeguard clauses).
- Medium-term consolidation needs:
  - Debt projected to remain high at close to 135 percent of GDP over the medium term and to increase in the longer term owing to pension spending.
  - Recommendation: legislate upfront high-quality measures to achieve a gradual and balanced adjustment aiming for an overall surplus of ½ percent of GDP by around 2025.
  - A neutral fiscal stance for 2020 could be considered only if accompanied by a credible medium-term consolidation plan.
- Consolidation priorities (spending, pensions, poverty, investment):
  - Spending: reduce current primary spending over the medium term while protecting the poor and continuing to increase public investment.
  - Pensions: preserve indexation of retirement age to life expectancy; ensure actuarial fairness, including for early retirement; adjust pension parameters to secure affordability.
  - Poverty alleviation: redesign the citizenship income program to align with international best practice—benefits are currently well above benchmarks, decline too quickly with family size, and fall sharply if a job offer is accepted.
  - Supporting investment: improve public investment management (feasibility studies, prioritization, implementation) and limit tax uncertainty.
- Revenue-side recommendations:
  - Improve tax design to promote growth and labor participation while protecting low- and middle-income households.
  - Labor tax wedge:
    - Italy’s average labor tax wedge is about 48 percent, compared to the EU average of about 42 percent.
    - Authorities’ plan reduces the wedge modestly by 0.2-0.3 percent of GDP in 2020-21.
    - A reduction to the EU average could cost 2 percent of GDP and should be offset by significant base broadening.
  - Broadening the tax base:
    - Rationalize tax credits and deductions in personal income tax.
    - Streamline VAT reduced rates with attention to distributional consequences.
    - Update property valuation to address equity concerns and increase collection at lower statutory rates.
  - Tackling tax evasion:
    - Compliance gap estimated at 6 percent of GDP.
    - Mandated electronic invoicing and transmission; improve monitoring and risk analysis by accessing financial data (addressing privacy concerns).
    - Strengthen institutional and governance arrangements of the tax agency and remove legal obstacles to tax debt collection.

### Climate policy
- Carbon taxation:
  - Carbon taxation is highlighted as the most effective tool.
  - While carbon taxes are high in some sectors, the bulk of emissions (mostly in electricity) is taxed at low rates.
  - A uniform carbon tax of €70 per ton of CO 2, above which excises should be added to correct for other externalities, would reduce emissions by 20 percent by 2030.
  - Such a tax could be phased in gradually; revenues could compensate impacted households or offset distortionary taxes.
  - Complementary measures: well-targeted public investment and incentives, energy price liberalization, and regulatory standards to promote clean technology.

### Financial sector: progress and remaining challenges
- Progress to date:
  - Prudential requirements raised and measures implemented to facilitate capitalization, lower NPLs, improve governance, and encourage consolidation of mutual banks.
  - Restructuring or recapitalization of several weak banks.
  - NPL ratio fell from 16 percent of loans in 2016 to 7.3 percent in September 2019; NPL sales at or above targets even considering market strains in 2018-19.
- Remaining challenges:
  - The capital ratio (fully loaded Common Equity Tier 1) is about 1.5 percentage points below the EU average.
  - The NPL ratio is over twice the EU average.
  - Profitability remains low, especially for small- and mid-sized banks, due to limited revenue growth potential, structurally high operating costs, business model challenges, and governance weaknesses.
  - Exposures to the Italian sovereign are relatively large; many banks are heavy users of the ECB’s Targeted Longer-Term Refinancing Operations.
- IMF FSAP recommendations to enhance resilience:
  - Capital and asset quality:
    - Further boost capital buffers in weaker banks.
    - Continue robust NPL reduction plans, with attention to unlikely-to-pay loans.
    - Extend SSM approach on provisioning expectations to less significant institutions with high NPLs.
    - Consider prudential policies to moderate the sovereign-bank nexus, phased-in to avoid market disruptions.
  - Profitability and governance:
    - Reduce costs and invest in technology.
    - Strong supervisory focus on business model viability and cost reduction plans.
    - Further bank consolidation is needed.
    - Close legislative gaps in implementation of EU fit and proper rules for banks’ management.
  - Supervision and crisis management:
    - Consider more escalated corrective measures and use all available tools in a timely manner.
    - Ensure special administration does not delay decisive action.
    - Build additional loss absorbing capacity over an appropriate transition period to facilitate orderly resolution or liquidation for less significant institutions.
    - Avoid using the deposit guarantee scheme for preventive measures as much as possible.
    - Enhance EU-level crisis management framework, including introduction of an orderly liquidation regime for non-systemic banks.

*Source: Italy: Staff Concluding Statement of the 2020 Article IV Mission (January 29, 2020).*

---


## References

- [Italy and the IMF](http://www.imf.org/external/country/ITA/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2020/01/29/italy-staff-concluding-statement-of-the-2019-article-iv-mission_