Italian inflation risk falling but public debt remains a threat

Italy’s economy has weathered recent crises successfully but is now slowing amid tightening financial conditions. To secure strong and sustainable growth over the long term, Italy should focus policy action on improving the business environment and competition, strengthening public finances and promoting the green transition, said the OECD in its latest economic survey.

The OECD Economic Survey of Italy projects economic growth of 0.7% this year, the same as 2023, and more positively 1.2% in 2025. Headline inflation is expected to fall gradually from 5.9% in 2023 to 2.6% in 2024 and 2.3% in 2025, in line with core inflation that is projected to reach 2.5% in 2025. Public investment has started to pick up and is expected to continue supporting the economy in the coming years, said the OECD.

Italian public debt, at about 140% of GDP, is the third highest in the OECD and remains a big risk. Public spending on ageing-related and debt servicing costs as a share of GDP is expected to increase by about 4.5 percentage points between 2023 and 2040. Tax and spending reforms are needed to help put debt on a more prudent path, said the OECD.

Steady fiscal consolidation, along with reforms to the pension system over several years, is the key priority for fiscal policy to lower public debt, it continued. Growth in spending needs to be contained, but at the same time public investment should be protected to minimise negative side-effects on growth, said the OECD.

The economy’s low energy intensity and abundant solar resources make Italy well placed to achieve the climate transition, but the pace of emissions reduction has slowed over the past decade, it pointed out.

“Additional policy efforts are needed to accelerate the reduction of emissions and adapt to climate change: fossil fuel excise taxes should be raised where possible and more closely aligned with fossil fuel emissions content as in recent plans. Complex permitting procedures that hold back the installation of renewable energy capacity need to be simplified to reach annual installation targets,” it said.

Transport could be further decarbonised by investing in the railway network, reducing the favourable tax treatment of diesel over gasoline and promoting electric vehicles, including through a greater number of charging stations, concluded the OECD.