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“The recent across-the-board reduction in excise duties on diesel and petrol, implemented to cushion the impact of the shock, should be replaced by monetary transfers targeted at the most vulnerable families.” The International Monetary Fund states this in Article IV dedicated to Italy, at the end of the mission which ended yesterday.
Energy measures: temporary and well targeted
“Measures to mitigate the impact of rising energy prices should be budget-neutral, temporary, well-targeted and not dampen the incentive to reduce energy consumption,” the IMF emphasizes.
New spending and defense: «It must be fully compensated»
The Fund also looks at defense: «Any new spending, including defense spending, should be fully compensated to safeguard fiscal sustainability». Improving spending efficiency, the economists add, “would help limit the effect of fiscal consolidation on growth.”
Debt, pensions and spending efficiency
The Fund’s economists point out in Article IV that «Italy’s high level of debt and pressures related to spending on aging limit options for growth-stimulating spending. The reduction of early retirement schemes is positive and will gradually increase labor supply, support growth and reduce pressures on the pension system. Furthermore, strengthening spending efficiency, including through digitalisation and a comprehensive review of spending to improve targeting, would contribute to debt reduction without compromising growth.”
Effective tax reform, move forward and rationalize benefits
“Ongoing tax reform has proven effective in improving tax compliance, and continuing these efforts, including through increased use of digital tools, will be essential for sustained revenue mobilization.” The International Monetary Fund states this in Article IV dedicated to Italy, specifying that “the tax system is complex and further rationalization of tax breaks would be crucial to improving its transparency and efficiency”. «The elimination of the flat tax on income from self-employment and the updating of property values in the land registry – the Fund’s economists further underline – would broaden the tax base, improve equity and support consolidation efforts. Finally, a further improvement in budget transparency and monitoring relating to the net expenditure path envisaged by the medium-term fiscal and structural plan would strengthen fiscal credibility”.
Financial sector in Italy resilient, can resist shocks
The Italian financial system “remains resilient, supported by record profits and strong capital and liquidity reserves”. This is what the International Monetary Fund writes in Article IV, specifying that “the health of the banking system is supported by record profits, good credit quality, solid capital and ample liquidity. Furthermore, stress tests indicate that the banking system can withstand serious adverse shocks”. According to the Fund’s economists, “the Italian authorities have made significant progress to strengthen the solidity of the financial sector. Looking to the future, the emerging risks and Residual vulnerabilities require a recalibration of priorities towards greater agility in supervision and a broader and more proactive use of macroprudential tools.”
More generally, the IMF then returns to the topic of reforms and explains that faced with the prospect of possible future adverse shocks, “it is urgent to restore productivity growth through reforms at national and EU level to relaunch growth and support fiscal consolidation”. To this end, the IMF argues, «easing regulatory barriers and improving policy predictability would help strengthen the business environment. Improvements in the justice system should continue, including bankruptcy proceedings, to facilitate capital reallocation. Deepening and better integrating capital markets at national and European levels would help foster innovation.”