Italy must reform to boost its slow growth rate, the OECD said, warning that with bond markets jittery and a high debt level that it was ‘crucial’ that Rome brings its budget back into balance. In its latest economic survey of Italy, the Organisation for Economic Cooperation and Development said the strength of Italy’s economic recovery is uncertain. “Italy must take additional steps to make growth more robust and boost its resilience to future shocks,” said OECD secretary general Angel Gurria.
The organisation said “it would be wise to plan for no more than the rather sluggish growth seen in the decade prior to the crisis.” It trimmed its 2011 growth forecast for Italy to 1.2 percent from 1.3 percent. The Italian government last month revised down its growth forecast to 1.1 percent from 1.3 percent.
Italy managed 1.3 percent growth last year. The OECD kept its 2012 growth forecast for Italy at 1.6 percent. The slow growth rate has hindered the recovery from the crisis, which according to the OECD Italy will manage in 2014, seven years after it began.
Given Italy’s sluggish growth “the priority remains structural reforms to increase growth potential,” said the OECD, which provides economic analysis and advice to its 34 members. But “with bond markets having become more sensitive to sovereign risk, action to bring the budget toward balance remains crucial,” it added.
Italy has one of the highest debt levels in the OECD, which the organisation expects to peak this year at 119.2 percent of gross domestic product (GDP) according to the EU’s calculation methods. The OECD called the Italian government’s fiscal plans “prudent” and noted that the Italian government recently announced additional measures to bring the budget nearly back to balance by 2014. Italy’s public deficit came in at 4.6 percent of GDP last year. It warned however that Italy might fail to achieve this with just spending cuts and a crackdown on tax evasion, and must be prepared to raise taxes if necessary. The OECD urged the Italian government to redouble its efforts to reform the economy to unlock growth, which would also have other positive benefits. “Stronger growth would of course also help the debt-to-GDP ratio to decline and public finances to improve,” it added. It recommended reforms to reduce regulation in the economy and boost competition, such as liberalisation of professional services such as taxi drivers and law, which have become stalled. The OECD also urged reforms to the tax system, lowering public ownership, and improving the efficiency of the education system. It noted that previous pension reforms had helped improve its sustainability, but that further increases to the pension age and increased flexibility will be needed.