Italy’s Spending Maze Runner – An analysis of the structure and evolution of public expenditure in Italy

Summary:

This paper explores the composition and developments of public expenditure in Italy and compares them with other big Member States. On the basis of this analysis, it draws several possible policy implications. Based on the latest available data by economic classification and function, Italy’s public expenditure appears to be increasingly biased towards the elderly, while growth-enhancing spending has been markedly restrained during the crisis. Debt servicing costs absorb significantly higher resources than in the rest of the euro area, so that Italy’s public expenditure remains above the euro area average as a share of potential GDP despite slightly lower primary expenditure.

Overall, the paper suggests that it may be difficult in the future to contain Italy’s primary expenditure solely by relying on spending cuts, while leaving the current perimeter of State action unchanged. A systematic and rigorously implemented spending review would be needed to increase the efficiency of public expenditure and make its composition more growth-friendly, in order to support ongoing structural reform efforts and boost the country's potential growth. Finally, positive spending review measures enacted so far in Italy, such as the so-called “Fornero reform” to reduce the much higher-than-average pension expenditure and ensure its sustainability in the long run, should be fully implemented also with the objective of increasing labour market participation and the adequacy of future entitlements.

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