OECD Urges Italy to Focus on Cutting Debt After Deficit Trimmed

Italy’s government has made “considerable progress” in improving public finances and should now make reducing the euro-region’s second-biggest debt a top priority, the Organization for Economic Cooperation and Development said in a report.

Italy’s debt will reach 134.2 percent of gross domestic product this year, excluding contributions to European bailouts. Given Italy’s progress in trimming its deficit, the government could get the debt down to the European Union limit of 60 percent of GDP by 2030 by achieving a structural budget surplus of 2 percent by 2017, the OECD said. The government is seeking to balance the structural deficit this year.

“Italy remains exposed to sudden changes in financial market sentiment,” the Paris-based OECD said in its economic survey report. “Large and sustained reductions in public debt are therefore the top fiscal priority.”

Italy has had the weakest economy in the OECD over the past decade and reducing the debt and making more efforts to reduce rigidities in the economy will help boost competitiveness, the OECD said. The euro bloc’s third biggest economy will contract 1.5 percent this year, before expanding 0.5 percent in 2014, the OECD said in the report.

“Italy’s real GDP growth per capita has been the weakest of all OECD countries over the past decade,” the report said. “This reflects very low underlying productivity growth and has resulted in long-standing fiscal difficulties and in stagnant, and recently declining, real income levels.”

Monti’s Reforms

The OECD urged Italy to continue the “structural reforms” implemented by former Prime Minister Mario Monti that included easing labor-market rules and partially opening closed professions. Italy should also seek to lower payroll taxes, particularly on the lowest earners, the OECD said in the report.

“Future reforms, in carefully planned and coordinated legislation, will need to remove remaining restrictions in professional and public services and promote a more inclusive labor market,” according to the report. “This requires helping workers with job-search and training, coordinated together with income support for the unemployed, whose families are most at risk from the increased poverty that prolonged recession has brought.”

Before it's here, it's on the Bloomberg Terminal.