Fiscal Policy, Public Investment and Structural Change in Italy

Executive Summary

Public investment raises output and mobilises private capital. Using regional data, the paper identifies shocks to green, digital, and knowledge spending and estimates dynamic effects on growth and structure. The response shows clear multiplier effects on GDP and complementary private investment. These gains are economically relevant and persist beyond the short run. They support a design where public outlays act as catalysts rather than substitutes.

The composition of spending matters for upgrading. Green and knowledge expenditures deliver the most robust and persistent gains in structural change indicators. Digital investment helps when baseline capabilities exist, but on its own it yields weaker and less durable effects. Policymakers should weight portfolios toward items with stronger learning spillovers and capability formation. Composition, not just volume, determines long-run payoffs.

Place sensitivity is a condition for effectiveness. Regional heterogeneity in initial capabilities, sectoral mix, and administrative capacity shapes multipliers and persistence. Uniform allocations risk underperforming where absorptive capacity is low. Tailoring instruments to local strengths and bottlenecks improve outcomes and reduces dispersion. The approach aligns with NRRP objectives to foster convergence.

Design implications for medium-term fiscal plans. To stabilise growth while advancing transformation, safeguard high-multiplier investment inside expenditure paths. Sequence measures to protect capability-building items during downturns. Embed regional diagnostics into project selection and monitoring. This raises the probability that investment translates into durable upgrading rather than transient stimulus.

Policy Recommendations

1. Safeguard high-multiplier public investment within expenditure paths and avoid pro-cyclical cuts during downturns.
2. Tilt portfolios toward green and knowledge domains with strong learning spillovers; use digital as a complement where capabilities already exist.
3. Make spending place-sensitive: target by regional absorptive capacity and sectoral mix, pair funds with staffing/service expansion, and reallocate based on monitoring.
4. Sequence implementation: front-load enabling measures (permits, procurement, grids, skills) and back-load heavier capex as capacity scales, leveraging NRRP co-financing.