The UPB’s solution to the decline in population and productivity

Over the last thirty years, with the exception of the post-pandemic recovery, Italy’s growth has consistently lagged behind the average for eurozone countries. In recent years, the National Recovery and Resilience Plan (PNRR) has managed to sustain capital accumulation and employment, but over the next decade the decline in the working-age population will reduce workers’ contribution to output to the point where there is a risk of becoming mired in the stagnant and exhausting dynamic of growth in the zero-point range.

Based on this analysis, covering the period from 1996 to 2025, the Parliamentary Budget Office (UPB), which gave evidence yesterday in the Chamber of Deputies on policy levers to support Italian growth, stated that to mitigate the impact of demographic decline, it will be “crucial to boost investment in innovation and productivity”. In summary, according to the UPB, productivity and investments aimed at increasing it will play a crucial role.

According to the latest Istat forecasts from August, by 2050 the workforce aged between 15 and 64 will fall from 24.8 million (in 2025) to 21.4 million – a reduction of approximately 3.4 million people of working age over 25 years. If the contribution from the workforce declines, then a larger share of economic growth will have to come from an increase in value added per hour worked. However, the problem is that productivity grew by only around 9 per cent between 1996 and 2025, with significant differences between sectors. It has risen particularly in the most innovative and high-tech sectors: in the pharmaceutical sector, one hour of work last year generated two and a half times the value added per hour worked produced in 1995, whilst in the manufacture of computers and electronics it was around 70 per cent higher than thirty years earlier. On the other hand, productivity has fallen in sectors that are more heavily regulated or protected from competition: it fell by almost 30 per cent in accommodation and food services between 1995 and 2025; in administrative activities, it fell by almost 40 per cent; and in services such as water supply and waste management, it fell by 60 per cent. As for output by sector, education recorded a sharp decline, reflecting the demographic decline, whilst traditional manufacturing sectors such as textiles suffered significant contractions, partly due to competition from emerging economies.

According to projections presented yesterday by the UPB, potential GDP growth – that is, how much the economy can produce with the resources available – will fall to almost zero around 2034 (when the contribution from the workforce will turn negative). To reverse the trend in productivity, investment in innovation would be needed, but according to the UPB, Italian businesses are still investing too little in machinery and technology, precisely at a time when the dual transition – green and digital – requires the opposite. Since 2016, the government has attempted to boost investment, initially through the tax incentives of the Industry 4.0 plan, alternating between two measures: until 2019, through increased depreciation allowances – that is, a deduction from taxable income exceeding the cost of the asset, available only to those with sufficient profits; and from 2020 to 2025, through a tax credit, which can be used to pay taxes and social security contributions even by loss-making firms. According to the UPB, on the one hand, the incentives have boosted investment and employment among beneficiary firms, with more pronounced effects in the case of the tax credit, which has also reached small businesses and the South; on the other hand, however, the recovery in investment ‘does not appear to be taking hold’.

With last year’s budget, the government reintroduced hyper-depreciation until September 2028. This decision spreads the burden on the public finances over time, but the UPB considers it less effective because the benefit is delayed, is contingent on profits, and risks rewarding companies that ‘would have made investments even without the incentive’. In other words, the state has prioritised the instrument that is easiest to manage from a budgetary perspective, but which the UPB considers less effective precisely in terms of the lever on which the possibility of breaking out of the cycle of low growth and low productivity depends.