Italian Government Expected To Approve Supplementary Budget

by Ulrika Lomas, Tax-News.com, Brussels

03 July 2006

An interim budget which aims to raise up to EUR8 billion in additional tax revenues through a crackdown on tax evasion and a possible increase in some taxes is expected to be approved by the government this week.

According to reports, the government has been engaged in meetings with trade unions and business representatives to thrash out the details of the supplementary budget, which Economy Minister Tommaso Padoa-Schioppa has said will be worth 0.5% of GDP.

It is believed that the main source of new revenue will be an intensified campaign to crack down on tax evasion, particularly in the area of value added tax. There may also be an increase in VAT on some products.

Italy has been ordered by the European Union to cut its deficit to 3 percent of gross domestic product in 2007, to conform with rules governing the eurozone. Currently, the deficit stands at 4.1% of GDP, and it is estimated by the government that the mini-budget will shave 0.1% off the deficit.

According to Padoa-Schioppa, Italy's public debt, which at more than 106% of GDP is one of the highest in the developed world, is set to increase in 2006, and he has warned that the deficit "risks exceeding the most pessimistic predictions" if it continues to run at the same pace as in the first five months of 2006.

Italian Prime Minister Romano Prodi is however hoping to bring about a 5% reduction in social security and other levies borne by the country's businesses.

"Our programme foresees the cut of 5 percentage points in the first year," Prodi stated in the run-up to April's general election, which saw him oust former leader Silvio Berlusconi. However, Prodi told an employers conference that he could give "no assurances" that the government would be able to bring about such a change, given the its precarious fiscal position.

Prodi has also pledged to increase capital gains tax on the sale of most securities to 20%, in part to fund the reduction in the social security tax burden. He also wants to reinstate an inheritance tax that was abolished by Berlusconi.

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