The Italian welfare state has been characterized by two key shortcomings: a double distortion functional and distributive profile and a deficit of “stateness”, especially as regards bureaucratic professionalism, institutional capacities and regional performance. A process of gradual modernization started in the 1990s, promoting important reforms in key domains. The considerable resources provided by the NGEU funds have in turn offered precious opportunities to enhance basic social infrastructures. The reform agenda is however far from completed, while new daunting challenges have appeared: (1) responding to a particularly unfavourable demographic transition; (2) enhancing the levels and quality of employment, especially as regards female participation and (3) adapting the labour market to the digital and green transitions. The huge public debt restricts the fiscal margins of manoeuvre. The deficit of institutional capacities remains a key root of Italy’s predicament, as it hinders the production of the necessary policy resources for overcoming it.