Tax Cuts Could Hurt Italy’s Credit Ratings, Says Public Auditor

by Ulrika Lomas, Tax-News.com, Brussels

29 June 2004

Tax cuts could jeopardise Italy’s future credit ratings if unaccompanied by reductions in public spending, the country’s most senior public auditor warned last week.

Prime Minster Silvio Berlusconi has staked his political future on pledges to deliver some EUR12.5 billion in tax cuts next year, to include a reduction in the top rate of income tax from 45% to 33% and the creation of a uniform lower rate of 23%.

However, he has faced mounting opposition to his plans from within his own four-party governing coalition, and is under pressure from the European Union to cut Italy’s budget deficit and reduce its public debt, which at 106% of gross domestic product is the highest in Europe.

Speaking last Friday, Fulvio Balsamo, chairman of the auditing control section at Italy's Court of Auditors overseeing public accounts, added to fears that the country cannot afford to pay for tax cuts, and warned that such a move could ultimately weaken international confidence in the nation’s fiscal system.

Presenting Italy's accounts for 2003, Balsamo forecast that the tax cuts "would have to be accompanied by an adequate and permanent cut in spending so as to avoid greater public sector borrowing and debt which could lead to a lowering of the credit rating with an impact on interest rates.”

Both Fitch and Standard & Poor’s have given Italy an AA rating, although the latter has assigned a ‘Negative’ outlook and warned on future ratings if the country’s fiscal indiscipline is not rectified.

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