OECD urges Italy stick with debt reduction measures as new PM Letta seeks to focus on growth

ROME – Italy must continue to bring down its public debt, the Organization for Economic Cooperation and Development said Thursday, even as the country’s new premier seeks a greater focus on economic growth instead.

Premier Enrico Letta on Thursday wrapped up a tour of European capitals where he expressed the growing antagonism within Europe to harsh austerity measures that, while bringing down the country’s borrowing costs, have literally driven Italians to suicide.

Debt reduction through spending cuts and tax increases tends to hurt economic growth in the short-term. Italy’s unemployment rate has risen sharply to 11.5 per cent and the economy is in a protracted recession.

In his inaugural address to Parliament this week, Letta said his primary focus would be on rekindling economic growth and getting more young people and women into the workforce.

Letta praised the work of the previous premier, Mario Monti, whose tax hikes, pension reform and labour market reforms brought Italy back from the brink of succumbing to Europe’s debt crisis. But he said “By restoring fiscal health alone, Italy dies.”

The OECD, a global economic watchdog, warned in a report released Thursday that Italy should not undo the budget improvements it has made, and that continued efforts are needed.

It recommended that Italy focus on controlling its public spending and further liberalizing the labour market. In a nod to priorities outlined by Letta, it called for reductions in marginal tax rates for workers, particularly women.

The OECD forecast Italy’s economy would shrink by 1.5 per cent this year and only grow by 0.5 per cent in 2014, worse than the government’s own projections.

It estimated that Italy’s debt would rise this year to 131.5 per cent of annual GDP, well over the 127 per cent in 2012. Next year, it forecasts it at 134.2 per cent.

The debt ratio of Italy, which has the third largest economy in the 17-country eurozone, is second only to that of Greece.

In its recommendations, the OECD urged Italy to “halt and reverse” the worsening debt-to-GDP ratio, saying it could be accomplished by balancing the budget along with structural reforms.

It said Italy’s budget deficit would be 3.3 per cent of GDP this year and 3.8 per cent next year. While that is lower than many large EU countries like France and Britain, it is still above the EU ceiling of 3 per cent.

Italy’s new finance and economy minister insisted that economic growth was key to reducing Italy’s debt.

“The creation of jobs is essential to resolving the debt problem,” Fabrizio Saccomanni told a parliamentary committee. “It’s with growth that you reduce the debt burden.”

Saccomanni, whose resume includes posts at Italy’s central bank and the International Monetary Fund, said there had been a psychological boost from the formation of a broad coalition led by Letta last weekend. Inconclusive elections two months ago had complicated that creation of a new government that could continue Monti’s reforms.

“I believe this will be an important element to dilute the sense of mistrust and of reciprocal paralysis that blocked, and perhaps sharpened, in these last weeks the sense of crisis in the country,” Saccomanni said.

He also pointed out that the OECD report hadn’t taken into account a recent decree to speed up long overdue payments from the government to private companies for services and supplies delivered in the past. Many of these companies suffered financially while they waited months, or even years, for payment from the government.