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IMF And Tremonti Agree On Tax Reforms

by Ulrika Lomas,, Brussels

01 April 2010

Seemingly in agreement with the Italian government, the International Monetary Fund (IMF) has observed that, while a modest and fragile economic recovery is under way in Italy, it will now be necessary to maintain fiscal discipline, reduce the burden of public debt, and implement structural tax reforms aimed at raising the economy's growth potential.

As efforts are made to reduce the fiscal deficit and put the burden of public debt on a declining path, the IMF suggests that a comprehensive policy package needs to be introduced to reinvigorate growth, focused on removing structural bottlenecks, improving the quality of public expenditure, and strengthening the financial sector.

The IMF expects the fiscal deficit in 2010 to be broadly similar to that in 2009. The limited discretionary fiscal stimulus in 2009 was designed to be deficit neutral, but the budget deficit still deteriorated by over 2.5% of gross domestic product (GDP), reaching about 5.5% of GDP in 2009.

In 2010, revenues will likely drop, it says, reflecting the one-off nature of some large tax receipts in 2009. Capital expenditures will also fall, while the unwinding of stimulus measures introduced in 2009 should be partially offset by modest increases in transfers to families, public wages and health spending (as envisaged in the 2010 budget).

It was confirmed that the Italian government intends to reduce the deficit gradually to below 3% of GDP by 2012, but the IMF cautions that the planned fiscal adjustment is based on the optimistic assumption of a strong and sustained recovery, full implementation of the earlier envisaged consolidation plans, and additional measures that have yet to be announced.

In the longer term, a fiscal consolidation by way of reductions in public expenditure is planned, allowing, in turn, a reduction in the tax burden which, the IMF believes, weighs disproportionally on salaried and retired workers. It suggests that, when the expenditure-based consolidation is firmly underway, the Italian government should consider tax reforms with a view to reducing that burden, while increasing tax compliance. Its opinion is that ad hoc revenue measures should generally be avoided.

The IMF’s conclusions on prospective tax reforms in Italy coincide very closely with those of the government, and this was emphasized by the Minister of the Economy, Giulio Tremonti, at the press conference to present the IMF’s report.

He was, obviously, quick to concur with the IMF’s opinion that the government had adopted the correct fiscal stance in the economic recession, by resisting pressure for a large discretionary fiscal stimulus; and also to accept the challenge presented by the need to pursue structural tax reforms, while avoiding temporary short-term action on taxes.

In fact, he took the opportunity of the IMF’s report on the Italian economy to stress that now, after the government’s successes in the regional elections, the time had come to begin consideration of the previously-announced three-year tax reform strategy. However, he also reiterated that the government’s promise of a reduction in the budget deficit equivalent to 0.5% of GDP this year would be respected.

TAGS: tax | economics | fiscal policy | gross domestic product (GDP) | International Monetary Fund (IMF) | Italy | tax reform

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