Nine questions and answers on the 2019 Economic Survey of Italy

By Laurence Boone, Mauro Pisu and Tim Bulman, OECD Economics Department

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1. Italy has been implementing the OECD’s recommendations for years, yet the economy has been weak. Should not Italy change approach?

Italy has implemented some of the recommendations of past OECD Surveys and these have been bearing fruit. For example:

• Past Surveys have recommended reducing social security contributions to raise employment. Such a cut was implemented on a temporary basis from 2015 and employment rose by about 3 percentage points. Employment growth started slowing when the reductions in social security contributions gradually expired.
• Past Surveys have recommended strengthening innovation policies and incentives for innovative investment. The Industry 4.0 programme has introduced fiscal incentives for investments in digital technologies, which have increased rapidly since then.
• Past Surveys have recommended improving public procurement and fighting vigorously corruption. Public procurement procedures have been restructured and harmonised across the country by reducing the number of contracting authorities, resulting in large cost savings; the anticorruption authority (ANAC) has taken on an important role in preventing corruption and is now a model for other countries.

There are many areas where In Italy has not taken action following OECD recommendations. For instance, past Surveys have recommended to:

• Accelerate and streamline bankruptcy procedures and make it easier to restructure insolvent firms. The new insolvency code has still to be approved by parliament.
• Increase R&D spending. The R&D spending is still one of the lowest across OECD countries (even after accounting for the effects of the Industry 4.0 plan).
• Increase available places in childcare facilities. They are low and one of the reasons why so few women work in a number of regions.
• Increase public investment, which has kept declining.
• Increase spending on and restructure public employment services. This process is just starting.
• Strengthen the apprenticeships system by introducing minimum training quality standards. Apprenticeships are widespread in Italy but their educational content remains limited.

2. What is the OECD’s view of the Reddito di Cittadinanza?

The Survey welcomes the large increase in resources to reduce poverty through the Reddito di Cittidanza. The measure is consistent with previous OECD recommendations and will help to direct a larger share of social transfers to people in poverty.

However, the Reddito di Cittadinaza could be improved and contribute more to boosting employment. Its current level of benefit is high by international standards and higher than the wages of many jobs, especially in poorer regions. This will discourage beneficiaries from working in the formal sector.*

To address this problem, the Survey suggests lowering the Reddito di Cittadinanza by 30-40%, tapering off the benefit as beneficiaries start working and their labour income grows, and introducing an in-work benefit system for low-wage workers to raise their take-home pay.

Overall the changes the OECD proposes for the Reddito di Cittadinanza, along with other changes to the personal income tax and social benefits, will cost about EUR 2.7 billion more than what the government already budgeted for the Reddito di Cittadinanza. The OECD is then recommending the Italian government to spend more on measures to lower poverty and increase employment than what the government has planned on doing.

The Survey also welcomes the increase in spending on public employment services planned for 2019-20 as they will be vital to ensure those receiving the Reddito di Cittadinanza engage in job search and training programmes. However, the OECD warns that other countries’ experiences show that improving employment services takes time. The OECD recommends developing a multi-year implementation plan based on enhancing skills of employment service staff, and additional investment in IT and profiling tools is needed.

3. What is wrong with encouraging early retirement to free up job opportunities for young people?

The new temporary early retirement scheme (“quota 100”) introduced with the 2019 budget will encourage people to retire earlier but its cost is high compared to its benefits. The scheme will increase pension spending by EUR 20 billion in 2021 and by EUR 40 billion by 2025. Italy’s pension spending as a share of GDP is already one of the highest among OECD countries, hampering the capacity of Italy to expand public investment, including in education.

There is no evidence that early retirement schemes free up jobs for other workers. They would exacerbate Italy’s existing problem of an ageing population by accelerating the shrinking of the working age population. People with tougher physical jobs should nevertheless be shielded from an increase in the retirement age.

4. How can a minimum wage help provide quality jobs and good working conditions?

Italy has many specific minimum wages tied to collective bargaining agreements. A general minimum wage would protect the low skilled in sectors where workers have little bargaining power and would reduce the risk of in-work poverty, which has continued to rise in Italy even during the recovery.

The minimum wage would need to be set at a rate that does not price low-skilled workers out of the labour market and would need to reflect differences in productivity between regions.

Moreover, it should be set and reviewed by a transparent process and based on objective considerations about labour market conditions. To protect low-wage workers and make work pay more, the Survey recommends introducing in-work benefits for low-wage workers.

5. What does the Survey recommend on migration?

The potential contribution of immigrants to Italy’s economy and society is huge. To ensure the support and understanding of native-born Italians, well-managed and evidence-based migration policies and debates are essential. It is also important to ensure that immigrants can access training, so as that Italy benefits from the skills, entrepreneurship and dynamism they bring.

Emigration from Italy has increased markedly since the start of the crisis, especially among young people. This is threatening sustained growth and living standards for the whole population. Policies to improve job prospects and salaries will increase Italy’s appeal as a place to live  and work. It will also contribute to the arrival of qualified immigrants from Europe and other parts of the world.

6. How can Italy become less vulnerable to higher interest rates?

Designing and following a credible fiscal policy would enhance fiscal credibility and lower further refinancing risks.

By implementing reforms and increasing the primary surplus Italy’s public debt would fall steadily. This would lower interest payments and free up resources to finance much needed investment, and fight poverty and social exclusion.

7. How vulnerable are Italy’s banks?

The banking sector is in much better health than in 2017 when the previous OECD survey was published:

• The stock of non-performing loans on banks’ balance sheets has declined drastically and continues to do so.
• Government interventions in the banking system have been effective and have cost far less than those in other countries.

But more needs to be done to ensure banks can continue to support business, especially small firms:

• The reduction in non-performing loans has been slower for small and medium-sized banks.
• The reform of cooperative and mutual banks has progressed but it is yet to be fully implemented.
• Keeping government bond yields low will safeguard the banks’ stability and capacity to provide credit.

8.What are the OECD’s economic forecasts for Italy?

Italy’s gradual recovery stalled in late 2018. The Survey projects GDP to fall by 0.2% in 2019, before growing by 0.5% in 2020. This largely reflects the sharp slowdown that took place in 2018 when Italy’s economy contracted by 0.6% in the third quarter and 0.4% in the fourth. The OECD projects the economy to recover growth by the second quarter 2019.

The slowdown has been broad-based, involving lower growth of exports, private consumption and investment caused by the slowdown in main trading partners (particularly Germany) and policy uncertainty. On top of the cyclical headwinds, Italy continues to suffer from low potential output growth which is estimated to be between 0-0.5% per year. This also explains why Italy’s projected growth rate is lower than elsewhere. While other countries sneeze, Italy gets a cold.

The downward revision in projected GDP growth raises the projected public deficit from 2.1% of GDP in 2018 to 2.5% in 2019. The difference in growth forecasts explains most of the difference between the deficit projections presented in the Survey and the government’s projections of 2% of GDP in 2019.

9. How was the OECD Economic Survey of Italy prepared?

Italy is a founding member OECD, which for more than 50 years has worked closely with successive Italian governments to provide policy advice and share good practices.

The Economic Surveys are biannual publications that review countries’ economic trends and performance and provide policy recommendations to raise growth and social welfare. All OECD member countries and some non-member countries undergo this review exercise.

All OECD Economic Surveys are prepared by the OECD Economics Department in collaboration with the other, more specialised, OECD Directorates. They are reviewed by representatives of OECD member states governments, gathered in Economic and Development Review Committee (EDRC), including the country under review. The EDRC is at the core of the OECD’s peer review mechanism giving representatives of all 36 OECD member governments and the European Commission the opportunity to exchange views on economic policies and best practices. The Economics Department revises the draft survey based on comments received by the EDRC. The EDRC delegates then approve the final version for publication, ensuring a broad-based consensus.

This process allows a fruitful exchange of views and sharing of experiences among governments, to improve each other’s policies. The next Economic Survey of Italy is scheduled for 2021.

* The Survey does not fully take into account all the implementation rules of the Reddito di Cittadinanza as they have been defined only recently (Law 26/2019). Some of the implementation rules encourage the employment of beneficiaries of the Reddito di Cittadinanza, such as the subsidy to firms hiring workers from the rolls of the public employment services, others discourage it, such as setting a minimum (Reddito di Cittadinanza for a single person plus 10%) salary for job offers beneficiaries can rightfully refuse.

Further reading:

OECD (2019), OECD Economic Surveys: Italy 2019, OECD Publishing, Paris.