Its latest survey hailed the ‘sizeable’ fiscal consolidation achieved last year, which had been rewarded by increased confidence in financial markets.
Italy had also made progress in carrying out structural reforms, it said. Over time, these would increase the productivity of its economy and therefore its global competitiveness.
However, the country's debt-to-gross domestic product ratio would continue to increase from the 127% recorded last year to 131.5% this year and 134.2% in 2014. The country’s deficit, which was within European Union budget limits last year at 2.9%, is expected to increase to 3.3% this year and 3.8% in 2014.
In light of this, the OECD called on Italy to continue its efforts to halt this upward trend, while at the same time using its limited resources to protect the incomes of the ‘most vulnerable’.
This could be achieved with either a balanced government budget or a small fiscal surplus, accompanied by a combination of growth-enhancing structural reforms and the implementation of the new unemployment insurance scheme,’ it said.
Despite the negative impact this would have on Italy’s economy, which is now expected to shrink by 1.5% this year and not 1% as forecast in November, the country would benefit, the OECD said. Its debt would reduce and its situation on the financial markets improve.
Budgetary measures should concentrate on permanent spending cuts, rather than increasing already high levels of taxation, while the tax system should be restructured to reduce inefficient expenditure and make compliance cheaper and simpler.
Italy’s coalition government, newly led by Prime Minister Enrico Letta, should focus on fully implementing recent reforms, the OECD said. In particular, it should ensure the Competition Authority used its new powers actively to promote greater competition in local public services, and in retail and professional services.
It should also broaden reforms by providing more support for job-seeking and training and providing a broader social safety net, while also negotiating with trade unions to align wages more closely with productivity.
OECD secretary-general Angel Gurría said: ‘Amid recession and rising unemployment it is sometimes difficult to see light at the end of the tunnel. But I am convinced that a commitment to the current reform strategy will result in better living standards and a stronger, more dynamic Italian economy.’
