Debt-laden Italy now better for living standards than Britain

Telegraph

4 days ago

Britain's living standards fell behind those in Italy for the first time since 2001 in a fresh blow to Rachel Reeves's efforts to boost economic growth and renew the nation's competitiveness.
Slow growth, rising worklessness and high inflation are all damaging Britain, raising fears that the UK is losing its status as a rich nation at the same as Italy shakes off its image as an economic basket case.
Once adjusted for the cost of living, GDP per capita – a critical measure of wellbeing, and a favoured target of Sir Keir Starmer's Government – is now higher in Italy than Britain.
According to the World Bank, Italy's GDP per capita rose to $60,847 (£44,835) last year, overtaking Britain's $60,620.
It comes as unemployment rose to 4.7pc in the UK, spending on benefits balloons and inflation is forecast to hit 4pc – double the Bank of England's target – in the coming months.
Britain's population is also rising rapidly, meaning GDP is stretched over a larger number of people.
By contrast Italy's is shrinking, so even as its economy grows at roughly the same pace as the UK's, GDP per capita is rising more quickly as output is concentrated among fewer people.
It comes despite Italy's Government debt of around 130pc of GDP – far above Britain's debt of around 100pc.
In its manifesto last year, the Labour party promised to 'kickstart economic growth to secure the highest sustained growth in the G7 – with good jobs and productivity growth in every part of the country making everyone, not just a few, better off'.
The Government has since indicated that GDP per head may be a target measure.
But on the World Bank's measure, adjusted for living costs, Britain has fallen from fifth to sixth place among the group of seven major democracies, with only Japan further down the rankings.
'Economic stagnation'
A study from the National Institute of Economic and Social Research earlier this year warned that 'economic stagnation over the past decade is now threatening the UK's position as a place for a high standard of living.'
The think tank found the poorest Britons are now worse off than the lowest-income households in countries, including Lithuania and Slovenia, countries once considered far from rich but which are now increasingly prosperous.
Efforts to reform the British economy have struggled even as Italy has had more success.
Labour's attempts to trim welfare spending and encourage more claimants back to work resulted in a backbench rebellion and a humiliating U-turn.
The Chancellor is expected to refocus her efforts on boosting productivity growth ahead of her Budget in the autumn, as she seeks ways to fill a hole of as much as £50bn in the public finances.
Meloni's Italy 'outperformed' expectations
By contrast economists have hailed Italian prime minister Giorgia Meloni's reforms.
Holger Schmieding, chief economist at Berenberg Bank, said Italy had 'outperformed' expectations.
'Italy has cut welfare entitlements under Meloni, so that people have more incentive to work instead of resting idle,' he said, adding that judicial reforms have also made progress.
Extra subsidies for home renovations also provided a remarkable boost to Italy's economy, as has EU spending under an economic recovery fund known as the Next Generation programme.
The scale of the shift in relative prosperity is significant, both as a sign of Britain's decline and Italy's revival.
Andrew Kenningham, from Capital Economics, said it could be comparable with 'Il sorpasso' – the overtaking – of the late 1980s when Italy's economy became bigger than Britain's.
That was taken as a sign Italy had finally shrugged off its reputation for stagnation – though it regained that status in the years following the eurozone's sovereign debt crisis.
Once again Italy has pushed past Britain, though the UK's GDP remains larger overall.
'It tells us that Italian and British citizens are equally well off in terms of what they can purchase. Average living standards are in principle the same, or in Italy very slightly higher now,' Mr Kenningham said.
Italians also have a higher life expectancy than Britons.
The country has become increasingly attractive to wealthy households from Britain as investors, entrepreneurs and non-doms seek shelter from rising taxes in the UK and instability elsewhere.
'Of all major countries in Europe, politically Italy is by far the most stable. This is unusual – it is not the history of Italy – but compared to politics in the UK, France, Spain and Germany, Italy looks good,' Mr Schmieding said.
'It has a stable, steady government which is not doing as much as it should, but is not doing anything seriously wrong, which is something you cannot say about many other countries.'
Yet for its success, Italy's economy still has its problems.
Paolo Grignani, from Oxford Economics, warned that the cash dished out with the renovation 'superbonus' – which gives homeowners tax credits for renovating their houses – 'led to a fiscal imbalance that will take years for the Italian government to rectify,' while construction has slowed since the scheme ended.
At the same time, Italian wages are not yet back above pre-Covid levels after adjusting for inflation, he said, unlike those in the UK.
A Treasury spokesman said: 'In our Plan for Change, we were clear on the need to put more money into the pockets of working people which is why we protected people's payslips from higher taxes, increased the national minimum wage for three million workers and why we're rolling out free breakfast clubs in every primary school and extending the £3 bus far cap.'