Oecd joins EU in telling Italy to cut debt

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Oecd joins EU in telling Italy to cut debt

By Denis Greenan (ANSA.IT) 16:02, November 21, 2013

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Rome, November 19 - The Organisation for Economic Cooperation and Development on Tuesday echoed last week's calls from the European Union for Italy to do more to cut its huge public debt, which at more than 130% of GDP is second in the eurozone only to Greece's.

But its chief economist told ANSA Rome was on the right track towards creating a "virtuous circle" between its fiscal-consolidation and growth policies. In its Economic Outlook, released Tuesday, the OECD said Italy is successfully reducing its budget deficit but failing to reduce its public debt.

The OECD forecast Italy's deficit-to-GDP ratio at 3% for 2013, 2.8% for 2014 and 2% in 2015.

Italy's public-debt-to-GDP ratio, however, is set to grow from 132.7% of GDP in 2013 to 133.2% in 2014. Only in 2015 is it projected to decline to 132.6%.

The OECD warned Italy will need to slash public spending even further than planned for 2014-2015 as a result.

However, OECD chief economist Pier Carlo Padoan said the Italian government was doing the right things to encourage economic recovery, although it could use prodding to do even more.

Thanks to measures announced by the government, Italy has "all the conditions" to generate "a virtuous circle" in terms of economic growth and debt reduction, said Padoan on the margins of a presentation for the OECD's Economic Outlook in Paris.

Italian government policies are following "the direction that the OECD has always indicated," namely to slash public spending to free up resources to cut taxes in growth-stimulating ways, such as reducing the cost of labour.

The OECD's top economist also emphasized the need for Italy's public spending-reductions to focus on increased efficiency rather than simpleminded cuts.

He said measures spearheaded by Italy's current government, led by Premier Enrico Letta, should work toward reducing Italy's public-debt-to-GDP ratio which, in turn, would put downward pressure on interest rates Italy must pay.

Having said this, Padoan added that the Italian government could use prodding to do even more. He explained that a "more ambitious programme" to consolidate finances at a faster rate than required by European rules would do a better job of ensuring a "rapid decline" of Italy's public debt.

In the Outlook, the OECD said: "Italy is exiting recession and growth is projected to rise through 2014-15 as fiscal consolidation eases. However, economic slack will remain large. The return to growth is supported by exports, which are projected to gain further momentum in the next two years as foreign demand accelerates. Domestic demand will gain momentum during 2014 as investment turns round. "Unemployment is set to remain high as the impact of rising demand is likely to initially increase average working hours of persons already employed. Cost and price pressures will stay weak.

"The underlying improvement in the budget deficit was substantial in 2013. The likely 2013 deficit of 3% of GDP reflects the appropriate operation of the automatic stabilisers, but with the debt-to-GDP ratio still rising, fiscal tightening of at least as much as programmed is needed in 2014-15. Putting recent reforms into practice is essential to strengthen the still weak recovery. Further reductions in labour taxation should be part of a coherent overall tax reform," the OECD said.

The European Commission said Friday the government's 2014 budget bill, currently wending its way through parliament, puts Italy in danger of not respecting the rules contained in the European Union's Stability and Growth Pact (SGP).

"There is a risk that the Draft Budgetary Plan for 2014 will not be compliant with the SGP rules," the European Commission said.

"In particular, the debt-reduction benchmark in 2014 is not respected".

The government replied that the EC assessment did not take into account proceeds from planned asset sales and public-sector spending cuts.

The budget has been criticised by unions and employers for not lowering labour costs or taxes enough to give the economy, in its longest recession for 20 years, a sufficiently strong shot in the arm.