Italy’s economy has been resilient to this decade’s major external shocks but incomes are lagging behind OECD peers, and significant new challenges loom. The 2026 OECD Economic Survey of Italy outlines priorities to meet these, strengthen the public finances and raise productivity and incomes.
by Tim Bulman and Emilia Soldani, OECD Economics Department
The latest OECD Economic Outlook, released in June 2026, projects output in Italy to grow by 0.5% in 2026, similar to growth in 2025 but slower than during the years after the pandemic. At the start of the year the economy’s momentum was improving, but this was set back by the Middle East conflict, which brought rising inflation and uncertainty and slowed spending. The Middle East conflict is the third large, unexpected external shock to Italy’s economy this decade, following the COVID-19 pandemic and the energy price surge caused by Russia’s full-scale invasion of Ukraine.
Italy’s economy has been broadly resilient to these shocks, with public support measures, led by the National Recovery and Resilience Plan (NRRP), helping to maintain modest growth. Still, with each shock, the gap between the incomes of Italians and those of most other OECD countries has widened. At the same time, generous government support measures have further inflated already-high public debt on current and future generations.
While we cannot know what shocks the future will bring, we know some of the looming challenges:
- Population ageing will reduce the number of workers, creating a tight labour market, lower growth and growing pension costs and demand for public services such as long-term care.
- Mitigating and adapting to climate change will reduce government revenues significantly over time, including lower fuel excise, while increasing the costs from natural disasters.
- Higher defence spending is required to maintain security and to meet commitments to Italy’s partners.
- Heightened competition from emerging economies and developing technologies is creating new challenges, as well as opportunities, for Italian business.
In recent years, Italy has pursued substantial structural reforms, investments and progressive fiscal consolidation, directed by the National Recovery and Resilience Plan and the Medium-Term Fiscal-Structural-Plan. The benefits of pursing these plans are already evident, from improved access to public services and education and training, faster court proceedings, better transport infrastructure and a rejuvenating public workforce, through to a lower interest premium charged on Italian borrowers.
The 2026 OECD Economic Survey of Italy emphasises the importance of pursuing this reform momentum to buttress Italy’s prospects amidst the challenges of the coming decades.
Sustaining the fiscal consolidation will reduce the economy’s exposure to shocks and free resources to invest in growth and well-being. Italy’s budget deficit remains large, at above 3.0% of GDP in 2025. The public debt ratio, at more than 137% of GDP, is likely to end 2026 the highest in the euro area. The Medium-Term Fiscal-Structural Plan lays out a more prudent path. It envisages net nominal public expenditure (net of interest payments, cyclical unemployment costs, and certain one-offs and adjusted for discretionary revenue measures) rising by 1.5% annually, implying a declining budget deficit.
Achieving this will require significant efforts. The coming years will bring new expenditures pressures from rising pension costs, defence and climate-related needs, among others. Old age pensions and interest payments make up a high share of overall spending (Figure 1), but options to contain this spending are limited. Containing pension spending, for example by maintaining the link between life expectancy and retirement age, avoiding new early retirement window and identifying ways to reduce high pensions will help protect spending on areas that support growth and well-being, notably education and infrastructure.
On the revenue side, addressing gaps in tax collections, by maintaining the limits on cash transactions and by avoiding further tax concessions, and increasing the contributions from property taxes can finance a lower tax burden on workers, especially those at lower wage rates.
Figure 1. Reducing high pension costs over the medium term would create space for growth-enhancing spending
Public expenditure by function, % of total, 2024
Note: Interests costs and investment have been deducted from all spending categories.
Source: OECD National accounts.
Enabling all working-age Italians to contribute to the workforce will help maintain living standards and improve the economy’s resilience as ageing reduces the number of working-age Italians. The share of youth out of training, education or employment is among the highest across the OECD, and many other young people emigrate. A previous Ecoscope blog discusses priorities for ensuring their education readies them for the job market, and that jobs in Italy are attractive.
Meanwhile, a lower share of women in Italy work than in most other OECD countries, despite important progress over the past decade. Reducing the barriers to working can help. The National Recovery and Resilience Plan’s investment in childcare facilities across Italy is expanding access. Encouraging flexible working arrangements and effective incentives for men to take up parental leave can help. Careful reforms to taxes and benefits can help avoid discouraging second earners.
Fostering more fast-growing high-productivity firms would help incomes catch back up with the leading OECD economies. The productivity of Italy’s large firms compares well with their peers. But productivity in small firms is generally relatively low and they make up a larger share of Italy’s economy (Figure 2). These firm’s growth can be fostered through:
- Streamlining and bringing stability to the regulatory and fiscal environment, including the public support measures provided to firms.
- Making it simpler to comply with administrative and tax compliance procedures, and continuing to address delays in the judicial system.
- Scaling up direct public support to R&D.
- Strengthening competition, including reducing the barriers to entering professional services.
- Improving managerial skills and practices, and reducing tax and regulatory incentives for firms to stay small.
Figure 2. The large share of smaller firms weight on productivity
Note: Industry, construction and market services (except public administration and defence; compulsory social security; activities of membership organisations). Both panels based on 2023 data, except employment in Panel A, which is 2024.
Source: Eurostat (sbs_sc_ovw).
Accelerating the transition to renewable energies and electrification will reduce Italy’s high energy costs. Energy costs are higher than most of its peers because of the high share of imported fossil fuels in the energy mix. They surged following Russia’s invasion of Ukraine and rose again with the Middle East conflict. These weigh on Italian businesses’ global competitiveness, and on households’ real incomes.
Shifting the energy system to lower-cost renewables requires large investments in generation, distribution and in electrifying energy use. Significant progress is being made – for example, Italy is among the leaders in the electrification of steel production. Reforms to energy markets, for example to provide long-term electricity storage and to stabilise the network, are attracting many private investors. The streamlining of permitting processes is helping overcome the complexity of Italy’s multi-layered governance and permitting arrangements. These efforts need to accelerate to achieve the scale required to reduce prices and durably protect Italy’s energy users from future energy shocks.
Maintaining the reform momentum and strengthening the public finances will be key to whether Italy’s incomes and well-being will close the gap with other advanced OECD countries through the challenges of the coming years. The foundations for stronger growth are already in place: a diversified industrial base, strong technical know-how, accelerating progress in renewable energy, high household wealth and access to substantial EU support.
Turning these assets into sustained improvements in growth and in living standards will require a steady, ambitious, coordinated and focused set of reforms. Italy’s recent progress, accelerated by the National Recovery and Resilience Plan, shows how this can be achieved. With the right policies, Italy can move from resilience to shocks to a more dynamic, inclusive and sustainable growth path.
References:
OECD (2026), OECD Economic Surveys: Italy 2026, OECD Publishing, Paris, https://doi.org/10.1787/539538b2-en
OECD (2026), OECD Economic Outlook, Volume 2026 Issue 1: Under Pressure, OECD Publishing, Paris, https://doi.org/10.1787/2d1956f0-en
Soldani, E. (2026, July). From classroom to career: Strengthening youth engagement in Italy. OECD EcoScope Blog.
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