Estimating The Impact of the Investment Tax Credit for Southern Italy Regions through a New Sub-National CGE Model

This paper evaluates the impact of a targeted tax credit introduced by the 2016 Stability Law and designed to stimulate investment in Italy’s Southern regions. Employing a new sub-national Computable General Equilibrium model tailored to Italy, the study captures national and regional effects by leveraging a Social Accounting Matrix that details the interconnections between commodities, sectors, and agents, encompassing both regional and national fiscal structures. The analysis considers the direct impacts of the tax credit on the targeted Southern regions as well as the indirect spillovers on non-beneficiary regions, contributing to the ongoing discussion on North-South convergence. Our findings show a modest increase in all components of national GDP, with more substantial regional effects, particularly in Southern Italy, with spillover benefits reaching the Center and North in the medium and long term. The regional fiscal multipliers are positive and align with the literature. Additionally, the cross-regional analysis reveals that Southern GDP growth positively influences Northern regions, indicating a degree of economic integration across Italy. The tax credit policy also appears to slow the widening of the North-South value-added gap, supporting gradual regional convergence. However, the measure does not achieve full fiscal self-coverage through increased tax revenues, resulting in a net fiscal cost for the central government.