Economic Policies
#31Key Findings
Shifting policy directions over a series of short-lived governments have left Italy performing relatively poorly (rank 31) with regard to economic policies. Its score on this measure has improved by 1.1 point relative to 2014.
Italy’s economic policies shifted under two governments, with the second Conte administration viewed as unable to meet the pandemic’s challenges, and the Draghi government leading the country to economic recovery. GDP plummeted in mid-2020, only to bounce rapidly back and settle into modest growth through 2021.
The initial pandemic approach focused on full or partial furloughs, with salary subsidies preventing layoffs. This was later made time-limited, with a shift toward investment spending intended to boost the economy. This policy package also included a number of structural reforms such as administrative procedure changes, and digital and environmental transformations.
Debt has shot to dangerous levels, topping 150% of GDP in mid-2020. Draghi’s shift to investment spending also boosted growth rates more than expected, enabling initial reduction in the debt. A proposed fiscal reform would streamline tax rules. Some tax reductions have been passed for lower and middle-range incomes.
Italy’s economic policies shifted under two governments, with the second Conte administration viewed as unable to meet the pandemic’s challenges, and the Draghi government leading the country to economic recovery. GDP plummeted in mid-2020, only to bounce rapidly back and settle into modest growth through 2021.
The initial pandemic approach focused on full or partial furloughs, with salary subsidies preventing layoffs. This was later made time-limited, with a shift toward investment spending intended to boost the economy. This policy package also included a number of structural reforms such as administrative procedure changes, and digital and environmental transformations.
Debt has shot to dangerous levels, topping 150% of GDP in mid-2020. Draghi’s shift to investment spending also boosted growth rates more than expected, enabling initial reduction in the debt. A proposed fiscal reform would streamline tax rules. Some tax reductions have been passed for lower and middle-range incomes.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
10
9
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
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
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
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.
The period under review saw dramatic political changes, which led to important economic policy changes. The second Conte-led government – supported by the Five Stars Movement, the Democratic Party, and several smaller parties of the left and center – faced, between the end of 2020 and the beginning of 2021, increasing internal difficulties and was widely perceived as unable to face the economic challenges deriving from the COVID-19 pandemic. More specifically, the first draft of the Recovery and Resilience Plan (PNRR), which was presented in January 2021 and outlined how Italy would profit from the substantial amount of funding allocated to the country by the Next Generation EU program, was seen as insufficiently specific. There were also serious doubts about the ability of the Conte government to ensure the implementation of the final plan. The government crisis and the formation of a new cabinet under the guidance of Mario Draghi – which is supported by a grand coalition that includes all the important parties, except Fratelli d’Italia (Brothers of Italy, FdI) – led to a deep change in economic policies. The new government swiftly revised the PNRR and submitted it in time to the European Commission. The final version of the plan strengthened the weight of economy stimulating investments and delineated a number of structural reforms (in the field of legal and administrative procedures, and digital and environmental transformations) with the purpose of eliminating obstacles to economic recovery. The economic policy and the effective management of the pandemic crisis contributed to an economic recovery which proved to be one of the fastest in Europe by the end of the year.
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How effectively does labor market policy address unemployment?
10
9
9
Successful strategies ensure unemployment is not a serious threat.
8
7
6
7
6
Labor market policies have been more or less successful.
5
4
3
4
3
Strategies against unemployment have shown little or no significant success.
2
1
1
Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Traditional labor market policies in Italy have proven largely inadequate to addressing the challenges of economic crises. The main measure to combat the effects of the pandemic crisis has been the “cassa integrazione,” a furlough scheme which temporarily subsidizes the salaries of workers, either partially or fully, who are made idle by private companies. The aim is to discourage companies from dismissing employees. By freezing occupation, this instrument reduces the incentives to innovate of firms.
The dramatic impact of the pandemic crisis on the Italian labor market was one of the most difficult challenges for government during the review period. The second Conte government mainly tackled the challenge with defensive measures. Increasing the availability of the existing “cassa integrazione” and prohibiting dismissals from work were the main measures adopted. This strategy, however, protected only a proportion of the workforce. Young people and women often employed in less regular jobs were more easily dismissed. The Draghi government in spite of resistance defined a time limit to these policies and prioritized investments as a way of boosting the economy. This gradually led to an improvement in occupation levels. However, the decent results of 2021 cannot be considered certain due to the expected recovery of the economy. The government also revised the citizens’ income policy, which was introduced by the first Conte government. The revisions made the requirements for granting the citizens’ income more stringent in order to reduce disincentives to entering the labor market.
The dramatic impact of the pandemic crisis on the Italian labor market was one of the most difficult challenges for government during the review period. The second Conte government mainly tackled the challenge with defensive measures. Increasing the availability of the existing “cassa integrazione” and prohibiting dismissals from work were the main measures adopted. This strategy, however, protected only a proportion of the workforce. Young people and women often employed in less regular jobs were more easily dismissed. The Draghi government in spite of resistance defined a time limit to these policies and prioritized investments as a way of boosting the economy. This gradually led to an improvement in occupation levels. However, the decent results of 2021 cannot be considered certain due to the expected recovery of the economy. The government also revised the citizens’ income policy, which was introduced by the first Conte government. The revisions made the requirements for granting the citizens’ income more stringent in order to reduce disincentives to entering the labor market.
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How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
10
9
9
Taxation policy fully achieves the objectives.
8
7
6
7
6
Taxation policy largely achieves the objectives.
5
4
3
4
3
Taxation policy partially achieves the objectives.
2
1
1
Taxation policy does not achieve the objectives at all.
The Italian tax system continues to be stressed by the need to sustain the combined burden of high public expenditures and of interests on the huge public debt accumulated in 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 (42.4% in 2019, according to the OECD) 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. As the antiquated land register has yet to be reformed despite repeated promises, inequities in the property-tax system continue to persist.
One of most significant measures introduced by recent governments has been the online system for submitting income-tax declarations, the “730 precompilato,” which has gained usage year by year. The online system replaces paper forms for the majority of income taxpayers, and makes it easier to double-check tax returns. The generalized shift to electronic invoices and the new VAT payment method have also increased the effectiveness of fiscal oversight.
After limited changes were introduced by the two Conte governments, such as a limited tax reduction (to a 15% rate) for self-employed workers (“partite IVA”) with earnings below €65,000 and write-offs for technological investments, the Draghi government has sent to the parliament a proposal for an encompassing fiscal reform. This reform should streamline the jungle of fiscal rules and exemptions. In the meantime, the government has introduced some generalized tax reductions for lower and middle-to-lower income rates. It has also renewed strong fiscal incentives for improving the energy sustainability of buildings.
Overall, the Italian tax system is able to generate a sufficient amount of resources, but is still in need of deeper reform to increase horizontal equity, reduce obstacles to competitiveness and facilitate foreign direct investment.
One of most significant measures introduced by recent governments has been the online system for submitting income-tax declarations, the “730 precompilato,” which has gained usage year by year. The online system replaces paper forms for the majority of income taxpayers, and makes it easier to double-check tax returns. The generalized shift to electronic invoices and the new VAT payment method have also increased the effectiveness of fiscal oversight.
After limited changes were introduced by the two Conte governments, such as a limited tax reduction (to a 15% rate) for self-employed workers (“partite IVA”) with earnings below €65,000 and write-offs for technological investments, the Draghi government has sent to the parliament a proposal for an encompassing fiscal reform. This reform should streamline the jungle of fiscal rules and exemptions. In the meantime, the government has introduced some generalized tax reductions for lower and middle-to-lower income rates. It has also renewed strong fiscal incentives for improving the energy sustainability of buildings.
Overall, the Italian tax system is able to generate a sufficient amount of resources, but is still in need of deeper reform to increase horizontal equity, reduce obstacles to competitiveness and facilitate foreign direct investment.
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To what extent does budgetary policy realize the goal of fiscal sustainability?
10
9
9
Budgetary policy is fiscally sustainable.
8
7
6
7
6
Budgetary policy achieves most standards of fiscal sustainability.
5
4
3
4
3
Budgetary policy achieves some standards of fiscal sustainability.
2
1
1
Budgetary policy is fiscally unsustainable.
Italian governments have struggled over the past years to pursue budget consolidation during an era of prolonged economic stagnation. Fiscal policies have gradually reduced yearly deficits and produced a strong primary surplus. Yet because of the slow economic growth, 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 had eased the country’s budgetary pressures prior to the pandemic crisis. The acceleration of economic growth through 2017 and 2018, slowed the growth in public debt.
However, the pandemic crisis dramatically changed the situation. The need to support economic activities during the pandemic has necessarily required a huge increase in deficit spending and public debt. The Draghi government, taking advantage of EU funds and of the supportive monetary policies of the ECB, has continued this public spending policy, but has firmly reoriented expenditures to infrastructural and digital investments in order to promote a speedier growth rate (although the implementation of these interventions is still on its way). This strategy has so far paid off as the Italian growth rate in 2021 has significantly exceeded expectations. This also enabled an initial reduction in the public debt stock, which is forecast to continue to decline for the next few years (NADEF 2021).
Citations:
http://www.dt.mef.gov.it/modules/documenti_it/analisi_progammazione/documenti_programmatici/nadef_2021/NADEF_2021.pdf
However, the pandemic crisis dramatically changed the situation. The need to support economic activities during the pandemic has necessarily required a huge increase in deficit spending and public debt. The Draghi government, taking advantage of EU funds and of the supportive monetary policies of the ECB, has continued this public spending policy, but has firmly reoriented expenditures to infrastructural and digital investments in order to promote a speedier growth rate (although the implementation of these interventions is still on its way). This strategy has so far paid off as the Italian growth rate in 2021 has significantly exceeded expectations. This also enabled an initial reduction in the public debt stock, which is forecast to continue to decline for the next few years (NADEF 2021).
Citations:
http://www.dt.mef.gov.it/modules/documenti_it/analisi_progammazione/documenti_programmatici/nadef_2021/NADEF_2021.pdf
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To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
10
9
9
Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
8
7
6
7
6
Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
5
4
3
4
3
Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
2
1
1
Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
In recent years, Italian governments’ research and innovation policies have been weak, underfunded and not strategically coordinated. The policy of linking university funding to the quality of research outputs has been continued and slightly strengthened over recent years. 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 running from 2017 to 2020 was a very successful attempt to catch up with the rate of economic innovation in other OECD countries.
During the height of the pandemic crisis, the second Conte government was not in a position to strengthen research and innovation policies. In 2021, under the Draghi government, the Ministry of University and Research (MUR) was able to allocate to the field of research a significant amount of the Italian Recovery and Resilience Plan (PNRR) Next Generation EU funds. More specifically, the plan aims to invest around €6.9 billion in applied research, which will connect universities, public research institutions and private firms, and push them to work together toward innovation.
Citations:
https://www.mur.gov.it/it/news/mercoledi-29122021/pnrr-pubblicati-i-bandi-le-infrastrutture-di-ricerca-e-le-infrastrutture
During the height of the pandemic crisis, the second Conte government was not in a position to strengthen research and innovation policies. In 2021, under the Draghi government, the Ministry of University and Research (MUR) was able to allocate to the field of research a significant amount of the Italian Recovery and Resilience Plan (PNRR) Next Generation EU funds. More specifically, the plan aims to invest around €6.9 billion in applied research, which will connect universities, public research institutions and private firms, and push them to work together toward innovation.
Citations:
https://www.mur.gov.it/it/news/mercoledi-29122021/pnrr-pubblicati-i-bandi-le-infrastrutture-di-ricerca-e-le-infrastrutture
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To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
10
9
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
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
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
1
The government does not contribute to improving the regulation and supervision of financial markets.
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. The Draghi government has strengthened this position and has used the international prestige of the prime minister to play a more active role in this field.
All in all, the high international reputation of the Italian prime minister and his professional background have been a catalyst for international negotiations. A clear example of this is the establishment of the minimum global tax during the G-20 meeting held in Rome under the Italian presidency.
All in all, the high international reputation of the Italian prime minister and his professional background have been a catalyst for international negotiations. A clear example of this is the establishment of the minimum global tax during the G-20 meeting held in Rome under the Italian presidency.