Italy: toward a growth-friendly fiscal reform
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Italy: toward a growth‑friendly fiscal reform Michal Andrle1 · Shafik Hebous1 · Alvar Kangur1 · Mehdi Raissi1 Received: 30 April 2018 / Accepted: 11 August 2020 © International Monetary Fund 2020
Abstract Published in late 2017, the Italian medium-term fiscal plan aims to achieve structural balance by 2020, although concrete, high-quality measures to meet the target are yet to be specified. This paper seeks to contribute to the discussion by (1) assessing spending patterns to identify areas for savings; (2) evaluating the pension system; (3) analyzing the scope for revenue rebalancing; and (4) putting forward a package of spending cuts and tax rebalancing that is growth friendly and inclusive, could have limited near-term output costs, and would achieve a notable reduction in public debt over the medium term. Such a package could help the authorities balance the need to bring down public debt and, thus, reduce vulnerabilities while supporting the economic recovery. Keywords Fiscal reform · Growth-friendly fiscal policy · Public pensions · Italy JEL Classification E27 · E62 · H55
1 Introduction Italy has been struggling with low economic growth since the 1990s. Productivity growth has been persistently anemic and has lagged that of the euro area—see Anderson and Raissi (2018), Andrle et al. (2018), Bugamelli and Lotti (2018) and the references therein. Held back by long-standing rigidities, the economy failed to take advantage of euro accession to modernize its institutions or adapt to a changing global trade and technological landscape. Pellegrino and Zingales (2017) attribute the weak productivity growth in Italy to the lack of meritocracy in the selection and rewarding of managers, and the inability of firms to take full advantage of the information and communication technology revolution. Akcigit et al. (2018) argue that political connections adversely affected firm dynamics, innovation, and creative destruction in * Shafik Hebous [email protected] 1
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Italy, weighing on the economic growth. Moreover, wage growth outpaced productivity growth, contributing to high structural unemployment; see Kangur (2018). Easy access to finance pre-crisis boosted demand, but the double-dip recession earlier this decade and the subsequent tightening of credit conditions set Italy back further; see Doerr et al. (2018), and Mohaddes et al. (2017). Implementing structural reforms are, thus, of greatest importance. High public debt and an inadequate composition of fiscal policy have also contributed to Italy’s underperformance. Public debt, above 130% of GDP and the second highest in Europe, has been a perennial source of vulnerability— see Reinhart and Rogoff (2010) and Chudik et al. (2013, 2017) who consider the consequences of high and rising public debt on economic growth. Italy has run primary fiscal surpluses that on average were higher than its euro area peers, but these were insufficient to lower debt and
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