Italy

   

Economic Policies

#34
Key Findings
With a new government shifting the reform focus, Italy scores relatively poorly (rank 34) with regard to economic policies. Its score on this measure has improved by 0.6 points relative to 2014.

Italy’s economy continued to grow during the review period, but at sluggish rates. The ongoing post-2014 recovery has yet to return the economy to pre-crisis levels. Recent labor, social and industrial reforms are only beginning to affect growth levels.

The government changeover in June 2018 led to a shift in economic policies, with the new government promising higher deficits resulting from increases in social and pension expenditures as well as tax reductions. Twin goals included fighting poverty and economic stimulus, but the policies had not yet taken effect by the end of the review period.

Labor-market rules over past years have led to a significant increase in employment, but largely of a short-term nature. The new government promised to introduce a “flat tax” (in fact two rates of 15% and 20%), but fiscal difficulties led it to settle initially for a tax reduction for some workers. Promised debt reductions have been slow to emerge, and the new government raised deficit projections substantially.

Economy

#33

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
6
During the period under review, there was a major change in the executive following the national election of March 2018. The center-left Gentiloni government was replaced in June 2018 by a new government based on the coalition between the Northern League (Lega Nord) and the Five Star Movement (Movimento Cinque Stelle). The new government has promised substantial changes in economic and social policies, but has had little time so far to introduce them. The Gentiloni government pursued an economic policy agenda oriented to driving economic recovery. Fiscal policy followed a careful path between respect for the euro zone’s rules and support for the domestic economy. Using some of the budgetary flexibility granted by the European Union, the government has prolonged the expansionary measures of previous years (e.g., the €80 monthly tax credit for low-income earners and the reduction of business taxes) and has added significant incentives for innovative investments in industry (the so-called Industry 4.0 program). The policies of the government have also encouraged public investment by local authorities, which in previous years had been severely constrained by the internal stability pact. Though public investment in infrastructure remains seriously below required levels. The costs of employing young people have been reduced and measures to tackle poverty have been strengthened.
The budget targets presented by the new Conte government in the revised Documento di Economia e Finanza (NADEF) introduce a significant change in budgetary policies, with higher deficits for the next three years deriving from increases in social expenditure, pension costs and tax reductions. The government’s declared goal is to fight poverty and provide a stronger stimulus for the economy, which started to slow down in 2018. For most expert observers, however, the measures envisaged are not the most apt for driving economic growth, particularly as investments are not at the core of this program.

Citations:
http://www.mef.gov.it/inevidenza/documenti/NADEF_2018.pdf

Labor Markets

#36

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
6
In the past, Italy’s labor market policies have been inadequate in meeting the challenges of the recent economic crisis. The main measure to combat the effects of a crisis was the “cassa integrazione,” which temporarily subsidized the salaries of workers, either partially or fully, kept idle by private companies. The aim was to discourage companies from dismissing employees. However, cassa integrazione had no effect on those who were unemployed.

The difficult economic situation further worsened one of the problematic features of the Italian labor market: the polarization between protected sectors and those that are largely unprotected and precarious. While older workers in the public sector and in large firms of the private sector enjoy sufficient and, in some cases, even excessive protection, young people and in general those working for small private sector firms are much less protected. Unemployment increased significantly over the last years, but the increase was particularly dramatic among young people. The lack of significant unemployment benefits has made young people’s economic position in society extremely precarious.

Starting in 2014, the Renzi and Gentiloni governments have shown a willingness to tackle this problem more resolutely. After some limited but immediate measures to make the hiring of young people easier, the government launched a systematic revision of the labor code aimed at encouraging firms to adopt more flexible but stable labor contracts. The law, informally called the Jobs Act, has given the government broad discretion to define specific labor market norms and has been accompanied by fiscal measures that should make the hiring of new workers more convenient for firms. During the period under review, the government has continued along the same path, gradually expanding the scope of this law and encouraging a new type of labor contract. This new labor contract increases employers’ ability to hire and fire, while also encouraging a shift from precarious to long-term contracts.
During 2017, a number of new measures have been introduced to strengthen protections for workers on short-term contracts and independent workers.
Overall the new policies have been relatively more successful in expanding the employment rate of older rather than younger workers. Furthermore, the significant increase in the number of employed people during 2017 and 2018 has been due mainly to the increase in short-term rather than permanent contracts (ISTAT).
The new and more inclusive social insurance benefit for those who have lost their job (NASPI, “nuova prestazione di assicurazione sociale per l’impiego”) is part of the Jobs Act and is a first step toward creating a national unemployment insurance. Though it does not cover young people who have never been employed.
The new government has promised to significantly change these policies by giving more space again to the “Cassa di Integrazione” and by introducing from next year a broad “citizenship income” to be subordinated to the acceptance of jobs proposed by restructured employment centers. The details of these policies are still not well defined.

Citations:
www.istat.it/it/archivio/219893

Taxes

#27

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
5
The Italian tax system continues to be stressed by the need to sustain the combined burden of high public expenditures and payment of interests on the very high public debt accumulated over the past decades. It is also defined by its inability to significantly reduce the very high levels of tax evasion or the size of the black economy. As a result, levels of fiscal pressure have remained very high over the years (42.5% in 2017) and the tax burden is far from equitable. Fiscal pressure is very high on those households or companies that do regularly pay taxes, and is very low for all those who can and do evade taxation (e.g., many businesses and large numbers of independent contractors and self-employed professionals). Families with children have very limited exemptions. Labor and business are also heavily taxed, which results in fewer new businesses and job opportunities. Italian tax policy provides limited incentives and no compelling reason to declare revenues. The monitoring of and fight against tax evasion within this system are insufficient and far from successful. One of the biggest problems is that the system results in significant competitive distortions that benefit non-compliant earners.

The Gentiloni government has not substantially changed this situation. The tax credit for people on low incomes which was introduced in 2014, has been maintained and has shown some redistribution effects, resulting in an improvement in Italy’s Gini coefficient. The same applies to the marginal increase in tax on financial assets, and reductions to income and corporation taxes. The stabilization of these measures has had a modest beneficial effect on the fiscal system, but more needs to be done. The antiquated land register is yet to be reformed, despite repeated promises. As such, inequities in the property tax system continue to persist.

The online system for submitting income tax declarations, the “730 precompilato,” has gained momentum. The online system will replace paper forms for the majority of income taxpayers and makes it possible to double-check tax returns. The shift to electronic invoices within public administration and the new payment method for VAT have increased the effectiveness of fiscal oversight.

New fiscal measures (accelerated write offs) to encourage investments in technological innovation introduced by the government took effect in 2017.
The new government, which formed after the 2018 election, promised a revolutionary “flat tax” rate for everybody (in fact two rates of 15% and 20%), but faced with the budget difficulties and other priorities has reduced its promises for 2019 to a more limited tax reduction (15% rate) only for autonomous workers (“partite IVA”) with earnings below €65,000.

Overall, the Italian tax system is able to generate a sufficient amount of resources, but is still in need of a deeper reform to increase horizontal equity, reduce obstacles to competitiveness, and facilitate foreign direct investment.

Citations:
http://www.sviluppoeconomico.gov.it/images/stories/documenti/Industria_40%20_conferenza_21_9
http://www.istat.it/it/files/2017/06/CS_-Redistribuzione-reddito-in-Italia_2016.pdf
http://www.cgiamestre.com/wp-content/uploads/2018/08/PF-TASSE-2017-18-1.pdf

Budgets

#37

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
6
Italian governments have struggled to continue the budget consolidation process begun by the Monti government during an era of prolonged economic stagnation. Fiscal policies have gradually reduced yearly deficits and produced a strong primary surplus. Yet because of the recession environment, attempts to reduce the huge debt stock (by selling, for example, public properties or stocks of state-owned companies) have had little success or have been postponed. The improved climate on the international markets and European Central Bank policies have yielded a sharp decline in interest rates for Italian long-term treasury bonds. This has eased the country’s budgetary pressures. After a modest recovery in 2016, economic growth accelerated through 2017, which has slowed the growth in public debt. However, the previous government’s promise that the ratio of public debt-to-GDP would start declining in 2016 will probably only become true in 2018 and may even increase again in 2019 – as the new government has proposed increasing the deficit in future, while economic forecasts predict lower GDP growth.

Fiscal policies for 2017 have benefited from the improved economic conditions. The government, in close coordination with the European Commission and taking advantage of the flexibility allowed by the European Union for countries introducing significant structural reforms, has pursued a path of modest fiscal consolidation balanced by measures to sustain economic recovery. Tax reductions and incentives for entrepreneurial activities have only partially been offset by reductions in public expenditure. In general, cuts to public expenditure, proposed in the government’s spending review, have been implemented more slowly than initially proposed. This has been due to resistance from interest groups and fear that such cuts would have recessionary effects. The pace of privatization of public assets has been slower than anticipated.
The vast majority of regional and municipal budgets are fiscally sustainable, though not all.
The new coalition government has decided to diverge significantly from this path, and plans to increase the public deficit for 2019 to 2.4% (contrary to previous agreements with the European Commission) and to postpone reducing public debt to 2020 or 2021. For a final decision, however, we will have to wait for the end of the budgetary process.

Citations:
http://www.mef.gov.it/inevidenza/documenti/NADEF_2018.pdf

http://www.rgs.mef.gov.it/_Documenti/VERSIONE-I/CIRCOLARI/2018/17/Nota_tecnica_n._1_Bilancio_2019-2021.pdf

Research, Innovation and Infrastructure

#28

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
5
In recent years, Italian governments’ research and innovation policies have been weak, underfunded and not strategically coordinated. The current government has not been able to make much headway in this regard given the tight budgetary context. In spite of complaints from universities, which are severely underfunded compared to other European countries, public funding for universities and R&D has not been increased. The existing policy to link university funding to the quality of research outputs has been continued and slightly strengthened. This policy is intended to incentivize universities to generate more quality research. Fiscal policies to promote investment in technological innovation in industry, introduced in 2016, gained momentum in 2017. The “Piano Nazionale Industria 4.0” program for 2017 to 2020 is an attempt to catch up with the rate of economic innovation in other OECD countries. As a result, there has been growing awareness of the strategic importance of R&D across society, in the media and among some politicians.
At the time of writing, the new government has not shown any specific interest to strengthen research and innovation policies.

Citations:
https://www.crui.it/images/documenti/2016/DM_programmazione_triennale_16_18.pdf
http://www.sviluppoeconomico.gov.it/images/stories/documenti/Industria_40%20_conferenza_21_9

Global Financial System

#35

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
6
The government and other public financial institutions (e.g., the Bank of Italy) have been generally supportive of international and European policies oriented to improve the regulation and supervision of financial markets. Typically for Italy, the government and the Bank of Italy have preferred a collective working style within the framework of EU and G7 institutions rather than embarking on uncoordinated, but highly visible initiatives. However, the government has occasionally failed to fully understand the implications for the economy and banking sector of the introduction of new international regulations. It has therefore not been fully prepared for the consequences of the new rules. The new government has not shown any great inclination to work cooperatively in European and international organizations.
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