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Italian Budget Proposals Scrutinized By EU

by Ulrika Lomas,, Brussels

28 October 2014

While Italy's proposed 2015 Budget has caused concern within the European Union, because of plans for a less-than-programmed fiscal deficit reduction, the budgetary decree has also caused a stir in Parliament as it features new measures absent when it was approved by the Cabinet.

In a confidential letter, dated October 22 and publicized by the Italian Government, the European Commission (EC) stated that Italy's draft 2015 Budget "postpones the achievement of [a structural budgetary balance] to 2017. … As a result, [it] plans to breach Italy's requirements under the preventive arm of the EU Stability and Growth Pact."

The particular problem for the Italian Government is that its draft Budget, which contains some EUR18bn (USD23bn) in tax cuts in an attempt to stimulate the economy, targets a deficit-to-gross domestic product (GDP) ratio in 2015 of only 0.1 percent below the three percent threshold imposed by the EU. Under the country's deficit reduction program previously agreed with the EC, it should be seeking a deficit of only 2.5 percent of GDP next year.

In the letter, the EC therefore wrote to ask the reasons "why Italy plans non-compliance" with the agreed program, and "to know how Italy could ensure full compliance with its budgetary policy obligations."

With the publication of the letter, the Italian budgetary proposals were also raised at the latest European Council meeting on October 23-24. However, following that meeting, Italy's Prime Minister Matteo Renzi suggested that an agreement with the EC will be easily reachable with a minimal EUR2bn funding adjustment to the Budget. It has also been reported that a compromise could be reached at a 2015 deficit level of 2.7 percent of GDP.

There were also modifications to its expected provisions when the draft budgetary decree was finally released and presented in Parliament on October 24, some nine days after its approval by the Cabinet.

In particular, while the decree contains the expected tax cut for businesses in 2015 by allowing the inclusion of the total costs of all employees not on fixed-term contracts when calculating the regional tax on production (IRAP), the Budget also proposes to return, retroactively, the IRAP headline rate to 3.9 percent for this year, instead of actioning the previously agreed ten percent rate reduction to 3.5 percent.

In addition, the decree retains a precautionary measure should Government spending cuts fail to yield the savings anticipated. This measure would prompt a 2 percent increase to the current 10 percent and 22 percent value added tax (VAT) rates with effect from the beginning of 2016. The headline VAT rate could also be increased by a further 1 percent in 2017 and a further 0.5 percent in 2018.

TAGS: compliance | tax | economics | business | European Commission | value added tax (VAT) | fiscal policy | budget | corporation tax | tax rates | Italy | tax breaks | Europe

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