Italy's budget deficit and debt to rise because of recession; higher public spending, OECD says

Italy's finances will deteriorate this year and next, with debt and the budget deficit both rising because of recession and higher public spending, the Organisation for Economic Cooperation and Development said on Monday.

In a special report on Italy, the Paris-based OECD said the deficit would rise to 2.5 per cent of gross domestic product this year, above the 2 per cent target Rome agreed in December with the European Commission. The economy will shrink by 0.2 per cent this year, the OECD said, confirming a forecast last month, before expanding 0.5 per cent in 2020.

Political uncertainty and high borrowing costs will offset the expansionary policies adopted by the coalition government of the 5-Star Movement and the League, it warned. Most other forecasters expect Italy's economy to stagnate this year rather than shrink. The government still officially forecasts 1 per cent growth, although it's expected to lower that in a new planning document later this month.

"Italy continues to suffer from long-standing social and economic problems," the OECD said, citing issues ranging from low employment and rising poverty to gaping regional disparities and stagnant productivity. Italy's inflation-adjusted, per capita GDP is lower than in the year 2000, it said, making it unique among the OECD's 36 member countries.

In a bleak 153-page report http://www.oecd.org/economy/surveys/italy-economic-snapshot, the think-tank forecast unemployment would rise from 10.6 per cent in 2018 to 12.0 per cent this year. "The dearth of job opportunities pushes many young people to emigrate, exacerbating Italy's already fast population ageing and depriving the country of energy, talent and entrepreneurship," it said.

The budget deficit will rise to 3.0 per cent of GDP in 2020, the OECD said, assuming the government does not adopt increases in sales tax included in its latest fiscal plan. Italy's public debt, proportionally the highest in the euro zone after Greece's, will hit a record 133.8 per cent of GDP this year and climb to 134.8 per cent in 2020, the OECD said.

The government targets a decline in debt from 132.1 per cent in 2018 to 130.7 per cent this year and 129.2 per cent in 2020. Rome's 2019 budget "rightly aims to help the poor," the OECD said, but it warned that the "citizens' income" welfare benefit would require marked improvements in job-search and training programmes to help people find jobs.

The budget's other flagship measure, a reduction in the retirement age, will lower economic growth in the medium term and risks worsening inter-generational inequality and increasing the public debt, the OECD said.

(With inputs from agencies.)