Italy must do more to reduce public debt, says IMF

11 Jul 12
Italy’s recently announced spending cuts are a step in the right direction but the country must do more to reduce its high level of public debt, the International Monetary Fund said yesterday.

By Nick Mann | 11 July 2012

Italy’s recently announced spending cuts are a step in the right direction but the country must do more to reduce its high level of public debt, the International Monetary Fund said yesterday.

At the conclusion of its annual review of the Italian economy, the IMF’s executive board commended the country’s government for initiating a ‘sizeable’ fiscal adjustment that is set to amount to 5% of gross domestic product between 2012 and 2014. In 2011 Italy reduced its budget deficit to 3.9% of GDP, compared to 4.5% in 2010.

It welcomed the Italian parliament’s approval of a structural balanced budget rule which is set to take effect in 2014 as well as plans for the creation of a new fiscal council. The government is also identifying further spending cuts to replace the need for a VAT increase planned in October.

But the IMF said the government needed to ‘rebalance the adjustment’ towards spending cuts and lower taxes. ‘The recently announced package of spending cuts is a step in the right direction,’ it said. ‘Directors looked forward to the swift follow-up on the ongoing spending review to reduce the overall level of government spending and improve its quality.’

In particular, it said there was scope for cutting the public sector wage bill, reducing tax expenditures and stepping up efforts against tax evasion.

‘This would create space for growth-supporting measures to reduce the labour tax wedge and encourage investment,’ it said.

Efforts to improve confidence in the Italian economy should also involve ‘locking in’ prudent medium-term policies to reduce the high level of public debt. Progress with pension reform was a positive step, as were plans to sell public assets, but the Italian government should pursue more comprehensive privatisation.

The IMF noted that despite the progress being made by the Italian authorities, the country’s economic and financial situation ‘remains challenging’. It also highlighted the importance of positive action to address the crisis affecting the eurozone as a whole.

‘Sustained implementation of this agenda needs to be supported by continued progress at the European level in strengthening the currency union,’ it added.

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