Berlusconi's Tax Cuts At Risk As EU Issues 'Early Warning' On Deficit

by Ulrika Lomas, Tax-News.com, Brussels

29 April 2004

The European Union is urging Italian Prime Minister Silvio Berlusconi to reduce the country’s debt and budget deficit levels, a policy which could jeopardise his plans to cut income tax.

The European Commission is forecasting that Italy’s budget deficit will reach 3.2% of gross domestic product in 2004, and has issued an “early warning” to the Italian government that it is about to breach the Growth and Stability Pact that stipulates national deficits must not exceed 3% of GDP.

“In our early warning we recommend that the Italian authorities take all appropriate measures to ensure that the general government deficit does not breach the 3% of GDP reference value,” stated the executive body’s new Monetary Affairs Commissioner, Joaquin Almunia.

Italy has at 106% of GDP the highest level of public debt in the EU, a fact that the Commission warns “is a further source of concern.”

In a bid to kick-start Italy’s economy, Berlusconi is proposing around EUR6 billion worth of tax cuts, including a reduction in the top rate of income tax from 45% to 33% and the creation of a uniform lower rate of 23%. However, this is in direct conflict with the Commission’s wish to see tax revenues increased or spending cut by a reported EUR7 billion.

Similar ‘early warnings’ have been issued to the governments of the United Kingdom, Portugal and the Netherlands, although the EU now expects the UK’s budget deficit to fall below 3% this year.

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