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Bank Of Italy Concerned At Increased Tax Burden

by Ulrika Lomas,, Brussels

02 September 2011

The Bank of Italy’s Deputy General Manager, Ignazio Visco, in his testimony to the Senate on the measures within the latest ‘anti-crisis’ budget, has questioned its deflationary impact on economic growth and the increase to the tax burden in the country.

Visco, while underlining that the aim of balancing Italy’s budget by 2013 could not be compromised by weakening its deficit-reducing net effect, said that any modification of the measures contained within it, which are currently being discussed between the country’s political parties, should be targeted at reducing the increased burden on taxpayers arising out of its revenue policies.

It has been calculated that, because of the new budget, the overall tax burden in Italy will increase between this year and 2014 by 1.9% of gross domestic product (GDP), to an historical maximum of 44.5%. That level would rise further if local authorities compensate for the government’s public spending cuts by increasing the taxes which they control.

In addition, he pointed out that Italy had, for some years, experienced a lower rate of growth than that of other European Union countries, and a successful elimination of the fiscal deficit in a period of lessening growth worldwide will risk economic stagnation in Italy.

Earlier this year, he said, estimates of the state of the country’s economy foresaw growth rates rising from 1.1% of GDP this year to some 1.6% in 2014. Following the proposed budget, those rates will inevitably decrease to below 1% growth this year, and “even worse” next year. Such low growth would also reduce the expected rise in government revenues and make the task of reducing both the fiscal deficit and public debt even harder.

Budgeted reductions to public spending, Visco maintained, would contribute only some 40% of the correction to the budgetary deficit. That would fall further if local authorities take the compensatory decision to increase taxation. In that case, the share of revenue increases in the budget would reach over and above its present level of just over 60%.

In the Bank of Italy’s opinion, the balancing of the government’s accounts should go hand-in-hand with tax measures to increase the prospect of growth in the economy, particularly a recovery in global competitiveness by reducing corporate taxes. If it is not possible to agree further reductions to public spending, a shift from direct taxation to indirect taxes could be considered, possibly by a rise in the rate of value-added tax or taxes on property.

During his testimony to the Senate, Luigi Giampaolino, the president of the Corte dei Conti, the public audit office, also questioned the reduction in disposable incomes, and consequences for Italy’s growth prospects, following the increased tax burden resulting from the budget.

TAGS: tax | economics | value added tax (VAT) | property tax | fiscal policy | budget | corporation tax | Italy

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