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Italy 2017 OECD Economic Survey Reforms are paying off, but challenges remain

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Italy is recovering after a deep and long
recession. Structural reforms, accommodative
monetary and fiscal conditions, and low
commodity prices have helped the economy to turn
the corner.

Published in: Economy & Finance
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Italy 2017 OECD Economic Survey Reforms are paying off, but challenges remain

  1. 1. OECD ECONOMIC SURVEY OF ITALY 2017 Reforms are paying off, but challenges remain 15 February 2017, Rome http://www.oecd.org/eco/surveys/economic-survey-italy.htm @OECDeconomy @OECD
  2. 2. Overview: Boosting Inclusive Growth in Italy  Structural reforms are starting to pay off: o Italy has made remarkable progress on structural reforms o This has helped Italy to emerge from a deep and long recession  Current challenges: o Slow productivity and investment growth; banks’ non- performing loans are a burden o More jobs are needed as well as better skills o Poverty among young and children should be brought down
  3. 3. The economy is finally recovering after a deep and long recession Source: OECD Economic Outlook 100 Database, projections revised as of 20 January 2017 GDP growth, annual % change GDP growth, annual % change -6 -5 -4 -3 -2 -1 0 1 2 3 4 -6 -5 -4 -3 -2 -1 0 1 2 3 4 2005 2007 2009 2011 2013 2015 2017
  4. 4. 0 2 4 6 8 10 12 14 Jan-2013/Nov-2014 Jan-2015/Nov-2016 Other new hirings New hirings on permanent contracts New hirings, millions Reforms have boosted hirings Source: Istituto nazionale della previdenza sociale (INPS) Osservatorio sul Precariato. Jobs Act enacted in early-2015
  5. 5. Higher employment has increased private consumption and growth Source: OECD Economic Outlook 100 Database -12 -8 -4 0 4 8 2000 2002 2004 2006 2008 2010 2012 2014 2016 Total fixed investment Private consumption Y-o-Y % changes
  6. 6. Fiscal policy is supporting growth Source: OECD Economic Outlook 100 Database, updated on 20 January, 2017. -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Cyclically adjusted government net lending, % potential GDP
  7. 7. 0 5 10 15 20 25 30 35 40 0 5 10 15 20 25 30 35 40 EST GBR NLD AUT DNK BEL LVA FRA SVK ESP SVN PRT IRL ITA GRC %% Banks’ non-performing loans are high Non-performing loans to total gross loans 2016Q2 or latest available Source: IMF Financial Soundness Indicators.
  8. 8. Good progress on structural reforms Source: OECD compilation. Reforms approved Ongoing reforms Reforms to do Jobs Act Youth Guarantee Spending reviews Budget making process Public procurement code Anti-corruption (ANAC) Tax evasion and compliance Public administration Competition law National anti-Poverty programme Job-search and training policies Buona Scuola Industry 4.0 Plan Lowering cash payment thresholds Permanent cut in social security contributions Real estate tax based on updated cadastral values Re-launching infrastructure spending Broad reform of insolvency procedures National anti-poverty programme
  9. 9. First challenge: Boosting growth and reducing banks’ bad debts
  10. 10. Productivity is low but is starting to recover Source: OECD Economic Outlook 100 Database, projections revised as of 20 January 2017. -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Annual % changeAnnual % change Total factor productivity Capital deepening Labour productivity (trend)
  11. 11. Public debt has stabilised but remains high Note: For more details see Economic Survey of Italy, 2017 Source: OECD Analytical database and OECD calculations. 100 105 110 115 120 125 130 135 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 % of GDP
  12. 12. Stronger growth will help reduce public debt Note: The baseline scenario considers the projections for the Economic Outlook No. 100 until 2018 and thereafter assuming yearly real GDP growth of 1%, primary surplus of 1.5% of GDP, effective interest rate of 3.2% and inflation of GDP deflator rising progressively to 1.5% by 2024 and remaining constant after. Source: Calculations based on OECD Economic Outlook: Statistics and Projections (database). 80 90 100 110 120 130 140 80 90 100 110 120 130 140 2000 02 04 06 08 10 12 14 16 18 20 22 24 26 28 30 Debt to GDP ratio, % Debt to GDP ratio, % Higher GDP growth (+0.5%) Higher interest rate (+1.4% points) Baseline
  13. 13. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 2000 02 04 06 08 10 12 14 16 % of GDP Italy France Germany United States % of GDP Government fixed capital Prioritise spending on effective infrastructure programmes Source: OECD Analytical Database; and OECD, National accounts database.
  14. 14. Tax collection remains low Note: The VAT revenue ratio is the ratio of actual VAT collection to revenue that would be collected if VAT was applied at the standard rate to the entire potential tax base and all revenue was collected. Source: OECD Consumption Tax Trends 2016: VAT/GST and excise rates, trends and policy issues. 0.0 0.2 0.4 0.6 0.8 1.0 1.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 MEX ITA GRC ESP TUR POL GBR ISL BEL FRA NLD SVK PRT CAN IRL AUS LVA FIN DEU OECD NOR HUN SWE CZE AUT DNK SVN CHL ISR KOR EST JPN CHE NZL LUX VAT revenue ratio, 2014VAT revenue ratio, 2014
  15. 15. Lowering social security contributions will boost job creation Source: OECD Taxing Wages. 0 10 20 30 40 50 60 0 10 20 30 40 50 60 NZL DNK AUS CHL ISL CHE MEX ISR IRL USA KOR CAN GBR NOR NLD LUX OECD JPN FIN TUR POL PRT EST ESP SVN SWE DEU GRC ITA BEL SVK CZE AUT HUN FRA % Average rate of employers' SSC Average rate of employees' SSC % ITA Average social security contribution (SSC) rate
  16. 16. 0 5 10 15 20 25 0 5 10 15 20 25 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Actual 13% write off ratio and slow bank loans growth 20% write off ratio and slow bank loans growth 30% write off ratio and slow bank loans growth 20% write off ratio and faster bank loans growth 30% write off ratio and faster bank loans growth %  Set gradual and bank-specific targets to reduce non-performing loans, backed up by sanctions. Reducing banks’ bad debts is urgent Note: For more details see Economic Survey of Italy, 2017. Source: Calculations based on OECD Economic Outlook No. 100: Statistics and Projections Database. % Bad debts (sofferenze) as % of total outstanding loans
  17. 17. Productivity is higher where public administration is more efficient Note: For more details see Economic Survey of Italy. Source: OECD calculations using ORBIS and Open Civitas data.
  18. 18. 0.0 0.5 1.0 1.5 2.0 2.5 0.0 0.5 1.0 1.5 2.0 2.5 Labour productivity growth Value added growth Total factor productivity growth % pts% pts A more efficient public administration raises firms’ productivity Effect on firms performance of increasing public administration efficiency from the bottom quartile to the top quartile of the province-level distribution Note: For more details see Economic Survey of Italy, 2017. Source: OECD calculations based on ORBIS database and OPEN CIVITAS data
  19. 19. Insolvency procedures are slow and costly Source: Doing Business 2016: Measuring Regulatory Quality and Efficiency (Resolving insolvency database).  Facilitate the emergence of insolvent firms as viable firms by using debt-equity swaps. 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 TUR CHL GRC EST HUN LUX CHE LVA SVK POL ISR ITA CZE MEX ESP OECD PRT SWE FRA USA AUS AUT NZL KOR DEU ISL CAN IRL DNK SVN GBR NLD BEL FIN NOR JPN Average recovery rate, % Average recovery rate, %
  20. 20. R&D spending is low Source: OECD Main Science and Technology Indicators database  Evaluate the effectiveness of recently introduced R&D fiscal incentives included in the Industry 4.0 plan. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 CHL MEX GRC SVK CHE POL TUR ESP LUX PRT ITA HUN EST IRL CAN GBR NOR ISL CZE NLD FRA OECD SVN BEL DEU DNK AUT SWE FIN JPN ISR KOR % of GDP Gross domestic expenditure on R&D % of GDP
  21. 21. Main recommendations Sustaining inclusive growth  Continue on the path of prudent fiscal policies and prioritise spending on effective infrastructure and innovation programmes.  Increase tax revenues by enhancing tax compliance (by investing more in IT systems and human resources, extending the use of e-invoicing and lowering the threshold for cash payments); and introduce real estate taxes based on updated cadastral values.  Use additional tax revenues to gradually reduce social security contributions on permanent contracts.
  22. 22. Main recommendations Sustaining inclusive growth  Continue to develop the secondary market for NPLs.  As envisaged by the European Supervisory Mechanism, set gradual and bank- specific targets to reduce NPLs, backed up by sanctions such as additional provisioning, sales of assets, suspension of dividend payments and restructuring banks’ operations.  If public funds are needed to recapitalise distressed banks, take full advantage of EU regulations, imposing losses on equity and bondholders, and restructuring banks’ operations. Compensate retail bondholders for the losses they will incur. More in the Assessment & Recommendations
  23. 23. Main recommendations Improving the business environment  Continue efforts to enhance the efficiency and transparency of the public administration by: making further progress on e-services; fully implementing the broad public administration reform; amending the parts of public- administration reform blocked by the Constitutional Court and swiftly implementing them.  Use debt-equity swaps more frequently by forcing creditors to share the burden of firm restructuring.  Approve the competition law under discussion by Parliament.  Evaluate the effectiveness of recently introduced research and development tax credits and other fiscal incentives in terms of innovation outcomes and forgone tax receipts.  Foster the development of the venture capital industry by leveraging private funds and expertise. More in Chapter 1 of the Economic Survey
  24. 24. 25 Second challenge: Improving skills
  25. 25. Unemployment has fallen but remains high Source: OECD, LFS database, Employment and unemployment (LFS) Unemployment rate, % Youth unemployment rate, % 20 25 30 35 40 45 0 3 6 9 12 15 2000 2002 2004 2006 2008 2010 2012 2014 2016 Total (lhs) Young, <25 year-old (rhs)
  26. 26. Skills are low Average literacy score-points Source: OECD Secretariat calculations using Survey of Adults Skills (PIAAC) 2012. 200 220 240 260 280 300 320 200 220 240 260 280 300 320 Immigrants Young Total population High education North Centre South Italy OECD Average literacy score-points
  27. 27. Skill mismatches are high Source: Survey of Adults Skills (PIAAC) (2012). 0 5 10 15 20 25 0 5 10 15 20 25 NLD FRA CAN POL BEL FIN SWE DNK EST JPN KOR USA NOR Average GBR AUS SVK IRL DEU ITA CZE AUT ESP Under-skilled Over-skilled % of over- and under-skilled workers in literacy, 2012
  28. 28. 0.0 0.5 1.0 1.5 2.0 0.0 0.5 1.0 1.5 2.0 USA ISR JPN EST SVK CAN GBR AUS NZL ITA CZE SVN KOR POL NOR ESP PRT CHE LUX DEU BEL AUT NLD HUN IRL FRA FIN SWE DNK % GDP Spending on job-search and training policies can be increased Source: OECD (2016c), OECD Employment and Labour Market Statistics. % of GDP Spending on active labour market policies
  29. 29. School results can further improve  Build partnerships between schools and firms to create high quality work-placements for students as foreseen by the Good School reform. Source: OECD PISA 2006, 2009, 2012 and 2015 Databases 450 460 470 480 490 500 510 2006 2009 2012 2015 B. Mathematics ITA OECD Score pts 450 460 470 480 490 500 510 2006 2009 2012 2015 A. Reading ITA OECD Score pts 450 460 470 480 490 500 510 2006 2009 2012 2015 C. Sciences ITA OECD Score pts
  30. 30. High level vocational education and training should be scaled up Source: OECD Education at a Glance 2016. 0 5 10 15 20 25 ITA POL CZE SVK BEL MEX DEU HUN GRC NLD LVA NZL ISL DNK TUR LUX EST CHL SVN OECD SWE GBR USA ESP SVK FIN NOR IRL KOR ISR FRA AUT JPN CAN % of adults graduated from short-cycle tertiary VET programmes
  31. 31. Main recommendations Enhancing skills  Employ more specialised counsellors and profiling tools in the public employment services.  Assess the labour market impact of job-search and training programmes and focus funding on those that are performing well.  Build partnerships between schools and businesses to create high quality work- based learning for students as envisaged by the Good School reform.  Scale up post-secondary VET with strong involvement of the business sector, based on the example of Istituti Tecnici Superiori.  Establish a national body on VET involving the business sector and all key stakeholders to link the training component of VET with apprenticeships; ensure high-quality workplace training and identify skills needed in the labour market. More in Chapter 2 of the Economic Survey
  32. 32. Third challenge: Reducing poverty
  33. 33. Poverty among households with children has increased Source: Istat. 0 2 4 6 8 10 12 14 16 18 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Couple with 3 or more children Couple with 2 children Couple with 1 child Couple with no children and with the head of household over 65 years old Absolute poverty rate, %
  34. 34. The share of transfers helping the poorest has decreased Source: OECD Income Distribution database. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Share of total cash transfers received by the lowest income decile%
  35. 35. 0 2 4 6 8 10 12 14 0 2 4 6 8 10 12 14 ITA TUR GRC ESP PRT CHL POL LUX LVA AUT USA EST ISR IRL FRA SVK NOR NLD SVN DEU SWE FIN BEL CZE CAN KOR CHE ISL DNK % % The transfer system is poorly targeted Source: OECD Income Distribution database. Share of total cash transfers received by the lowest income decile, 2013
  36. 36. Main recommendations Reducing poverty  Fully legislate and implement the planned nationwide anti-poverty programme, target it towards the young and children and ensure it is sufficiently funded. More in the Assessment & Recommendations
  37. 37. Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Follow us on twitter: For more information http://www.oecd.org/eco/surveys/economic-survey-italy.htm OECD Economics OECD

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