Italy's Recovery Plan Expected To Improve Human Capital

The Italian government's focus on promoting investment in Research and Development (R&D), improving the education system and strengthening worker employability through its National Recovery and Resilience Plan (NRRP1), should positively affect human capital development over the long-term. Strengthening human capital is one of the key factors underpinning an improvement in Italy's economic outlook (see the commentary Italy's Human Capital: A Key Social Factor for Economic Development). DBRS Morningstar calculates that Italy's government has scheduled for deployment funds of around EUR 77 billion (4.3% of GDP), out of a EUR 235.1 billion total envelope, the majority of which is to be spent by 2026. This expenditure, including the reforms attached, will likely have a direct and indirect impact on both the demand and the supply of human capital. This is expected to contribute to a more than doubling of potential economic growth from 0.6% to 1.4% by 2026 according to government estimates.

To achieve optimal results, great effort is needed to overcome weak capacity to spend, which tends to be constrained by red tape and to improve coordination between public entities. Moreover, policy continuity to work through general internal resistance including administrative bureaucracy and additional reforms, such as encouraging growth of company size and increasing school autonomy, will be required to achieve the desired results.

Key Highlights:
• R&D investment is expected to rise supporting demand for skilled workers.
• Better co-ordination between firms and universities should positively affect human capital.
• Reforms might come up against internal resistance and weak coordination, requiring more time and government policy continuity.

“Beyond important reforms, including the public administration and the justice system we have to consider the impact the Italian NRRP could have on human capital. This is key in our view as it could positively affect both labour productivity and the supply of labour over the medium- to long-term. Nevertheless, a large share of the NRRP’s resources are one-off and additional funding might be needed in the future. Moreover, It is difficult to make things happen in Italy therefore we will monitor the effectiveness of the legislative implementing process and if internal opposition to reforms hinders the success of the plan” said Carlo Capuano, Vice President in the Global Sovereign Ratings Group.