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Italy enjoys cyclical recovery, but faces fiscal challenge

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 2005
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Italy’s economy is experiencing a modest cyclical recovery, backed by a rebound in investment and exports, the IMF said in its annual economic assessment. However, there are downside risks stemming from higher oil prices and the euro’s appreciation. In addition, the fiscal situation remains weak, and fiscal pressures will likely rise in coming years due to population aging. While labor participation rates have increased, productivity has been stagnant. The IMF’s Executive Board said Italy needs to boost its growth potential by securing durable fiscal consolidation and pressing ahead with further structural reforms to enhance competition and strengthen the business environment.

Italy has managed to keep its fiscal deficit below the Stability and Growth Pact’s ceiling of 3 percent of GDP in recent years, but this has partly been due to one-off measures. The authorities agreed that in coming years there was a need to reduce the deficit, eliminate one-off measures, and ease the tax burden. The Board urged the adoption of structural measures to ensure that this year’s deficit target is met and regretted that the 2005 tax cut had not been tied to additional structural expenditure cuts or delayed. Regarding the large public debt burden, the Board favored achieving a small structural fiscal surplus before the end of the decade and underscored the need to clarify further the sources of the large gap between fiscal deficits and public sector borrowing requirements.

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Estimates
2005

Projections
(percent change)
GDP growth1.80.40.31.51.7
(percent)
Unemployment rate9.59.08.78.38.0
(percent of GDP)
General government
Overall balance-2.6-2.3-2.4-2.9-3.1
Gross debt110.6108.6106.2105.8104.4
Data: IMF staff report, January 2005.
Data: IMF staff report, January 2005.

The Board commended Italy’s passage of a pension reform and supported plans to step up privatization efforts. Product and labor market flexibility needs to be improved, however, as deep-seated rigidities are stifling competition and impeding innovation, investment, and efficiency. The Board welcomed positive trends in Italy’s financial sector and noted the importance of strengthening securities market regulation and corporate governance standards.

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