Are Italy’s Public Finances Sustainable? The Role of Demography, Productivity and Labour Markets
26 Pages Posted: 2 Feb 2012
Date Written: April 3, 2008
In light of the uncertainty of the effects of population aging on growth and fiscal variables, it is sensible to ask whether Italy’s public finances can achieve sustainability under the spending pressure exerted by future demographic and macroeconomic developments. The paper addresses this question by assessing long-term fiscal sustainability, following the commonly-agreed European methodology, under alternative scenarios considering a variety of issues that may have a bearing on Italy’s public finance conditions, namely, immigration, life expectancy, female labor participation, and productivity growth. Despite the different hypotheses captured by the alternative scenarios, the paper finds that projected debt-to-GDP ratios decrease over time, as long as fiscal consolidation is achieved in the near future. It also shows a one-shot debt-reduction strategy is not a credible substitute for a budgetary-adjustment strategy. The paper concludes Italy’s public finances are sustainable and can deal with future spending pressures resulting from the aging population.
Keywords: Fiscal Sustainability, Fiscal Policy, Debt Projection
JEL Classification: E62, H63, H55
Suggested Citation: Suggested Citation