The new OECD estimates arrived today give credit to what Minister Franco said (“GDP will grow by more than 5.8%”). The Parisian organization estimates Italy’s economic growth of 5.9% this year and 4.1% in 2022, after a drop in GDP of 8.9% in 2020. The second quarter stronger than expected explains the upward revision from the 4.5% expansion forecast for 2021 in the OECD’s May Economic Outlook.
For the return of GDP to pre-Covid levels will have to wait until the first half of 2022.
In general, the OECD underlines how the Italian economy is recovering from the Covid crisis thanks to the vaccination campaign and generous fiscal support for families and businesses. The study also states that the fiscal support was able to effectively mitigate job losses and preserve production capacity. The increase in public spending, including through the funds of the Next Generation EU, will support greater investments and will be accompanied by a climate of greater confidence and an increase in demand.
PNRR unique opportunity for a greener and more digitized recovery
The OECD recalls that the risks to the outlook are great, including variants of the virus and the path of global interest rates. “To increase growth and employment above pre-pandemic levels, the composition of public spending and taxes must improve”, argue the OECD experts who indicate the national recovery and resilience plan to offer a unique opportunity to create a greener, more digitized and productive economy. “Achieving this will require a demanding set of legislative and administrative reforms. Improving civil justice, tax administration and public investment will be essential to increase income growth ”.
“Italy’s National Recovery and Resilience Plan is activating stronger, greener, fairer and more digitized growth that will benefit all Italians with better opportunities to move forward,” argues the OECD Secretary General, Mathias Cormann. “A more efficient public sector is essential to guarantee its success – continues Cormann -. The plan must be fully implemented and integrated with reforms to support further growth, including with greater investments in green infrastructure and research and development and reforms to continue driving the effective digital transformation of the Italian economy ”.
The OECD states that the National Recovery and Resilience Plan (PNRR) offers a unique opportunity to create a greener, more digitized and more productive economy. The Government, the study reads, has set an ambitious program that rightly gives priority to reforms, competition and the public sector and to strengthening the effectiveness of civil justice systems in order to address the uncertainty, delays and costs that currently hinder investment. The competitiveness of Italian companies can be improved through investments in green infrastructures and broadband.
The study suggests that the chances of successful implementation of the reform plan are much higher than in the past. Implementation methods, milestones and clear objectives for the disbursement of funds under the Next Generation EU have been disclosed and the recently passed laws related to simplifying green investments and supporting decision making will contribute to the successful implementation of the Plan .
The opinion on Quota 100 and the Woman Option
The new OECD report rejects Quota 100, suggesting that it expire at the end of the year without any extension. The OECD, taking up an estimate made by the Treasury, recalls that adopting Quota 100 on a permanent basis, pension expenditure would record a cumulative increase equal to 11 percentage points of GDP between 2020 and 2045. The OECD therefore believes that it would be appropriate to leave Quota 100 expire in December 2021, as well as the so-called ‘Woman Option’ which gives the right to early retirement with a treatment calculated on a contributory basis up to the end of the year. According to the OECD, this measure amplifies the risk of poverty in old age. In general, on the pension system, the OECD sees the pressures on spending linked to demographic aging and interest “high and destined to increase in the long term”.
On the subject, the Minister of Economy, Daniele Franco, limited himself to saying that between the end of 2021 and the beginning of next year there will be a strong change in retirement requirements and the 100 quota will expire. “We must discuss it in the government” but “I am confident that the executive will find a balanced solution in the next budget law”, were his words.
OECD suggests lower labor taxes
The OECD report on Italy recalls how taxes on labor remain too high. The report recommends the implementation of comprehensive tax reform to reduce system complexity and labor taxes. This should be funded through better compliance, driven by increased use of technology and card payments.
In Italy, compared to the average of the OECD area, the revenue deriving from taxes on labor is higher, while the revenue deriving from inheritance taxes and the collection of VAT is lower also because there is a significant VAT exemption threshold. The tax wedge on labor is high, recalls the OECD, even if it has been reduced through income tax cuts, reforms of household allowances and temporary cuts in social contributions. The OECD then underlines how the high number of tax breaks contributes to the complexity of the situation in Italy.
A holistic tax reform should aim to mitigate the complexity of the regime and permanently reduce taxes on labor, financed through revenues from improved levels of compliance, lower tax expenses and higher taxes on real estate and inheritance.