OECD tells Italy to reverse pension rule, boost credibility

Italy's challenging budgetary situation and stagnant economy mean there's increasing urgency for measures to get control of the fiscal situation and reduce public debt, according to the Organization for Economic Cooperation and Development.

The OECD report comes at a time of dire economic circumstances for Italy. Output never recovered to the pre-crisis peak of 2007 and the country is back in recession. The Paris-based organization highlighted issues with poverty, employment and banks, and reiterated its call for a balanced tax mix with a burden shift from labor to property.

The OECD said the populist administration in Rome must do more to "boost fiscal credibility," and recommended a medium-term fiscal plan to steadily raise the primary surplus, or the difference between revenue and spending before interests on debt.

"Steadily raising the primary surplus to above 2% would help to put the debt-to-GDP ratio on a stronger downward path," the OECD said Monday. "Lower borrowing costs and improved confidence would likely offset the dampening effect on activity."

Among the high-profile recommendations to cut spending, the OECD said the government should reverse changes in early retirement rules that allow Italians who have worked at least 38 years to become pensioners if they've reached 62 years of age.

Presenting the report in Rome, OECD Secretary General Angel Gurria said that the reversal of the measure would free up as much as €40 billion ($45 billion) by 2025. Speaking at the same event, Italian Finance Minister Giovanni Tria countered that the early retirement plan is temporary and primarily aims at increasing the turnover in the public administration, thus facilitating the increase in productivity that the OECD asks for.

"Italy faces the double challenge of reviving growth and making it more inclusive while putting the public debt on a steady downward path," the OECD said. It recommends reforms to boost productivity including revamping the public employment services that help jobseekers.

The report reiterated a March 6 forecast that Italy's economy will contract 0.2% this year. That, it said, would raise the debt to 133.8% of gross domestic product from 132.1% last year.

"If accompanied by a rise of the primary surplus to above 2%, the proposed reform package would help to put the debt-to-GDP ratio on a downward path," the OECD said.