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Italy Suffers Another Austerity Budget

by Ulrika Lomas,, Brussels

06 December 2011

Following the previous austerity budgets of the Berlusconi government earlier this year, which had the target of bringing the Italian budget back into balance by 2013, the new government, headed by Mario Monti, has now announced a further package of measures in an attempt to provide additional reassurance that the target will be reached.

In fact, the government, in a statement, emphasized that the measures were necessary to confront the financial crisis that has seen Italy under continued and sustained attack in the markets, but that it has also attempted to begin the necessary structural fiscal reforms to encourage economic growth.

It is intended that the total package will take a further EUR20bn (USD26.8bn) out of the fiscal deficit. However, the total budget amounts to EUR30bn, in that EUR10bn will be utilized to fund policies introduced to induce businesses to grow and provide added employment.

Out of the EUR30bn, it is envisaged that up to EUR13bn will be provided by means of public spending cuts, and the remainder by way of new taxation. While further action has been taken on state pensions, it had been feared that individual income tax rates would also have to rise. However, such proposals have not materialized, not even at the higher tax bands, but new levies will applied, particularly on property and more wealthy taxpayers.

Monti had already expressed the opinion that the tax burden on Italian local property assets is particularly low, relative to other European countries. In particular, Italian property taxes currently exclude taxpayers’ primary residences (also said to be an anomaly in European terms).

It is therefore no surprise that the new measures include an extension of local taxes to primary residences, also accompanied by a 60% revaluation in the official value (‘valore catastrale’) of properties. IMU, the new unified property tax, will be brought forward from 2014 to 2012. A rate of 0.40% will apply to first residences, with all other residences being subject to the expected standard rate of 0.76%.

In 2012, there will also be a tax, at an as yet unspecified rate, on luxury cars, aeroplanes, helicopters and boat moorings, while, in a further attack on tax evasion in the domestic economy, the limit on cash transactions in the economy will be further reduced to EUR1,000.

For the business sector, there will be a federal income tax reduction equivalent to the incidence of labour costs within the regional tax on productive activity (IRAP), while IRAP will also be reduced for those companies increasing the employment of women and the young. Amongst other measures, it has also been decided to introduce tax incentives which will favour increased share capital being placed into firms.

Within the budget, the government has included a possible further increase of 2% in the 10% and 21% rates of VAT (already increased by 1% in September this year). The VAT rise will only enter into effect on September 1 next year if it is foreseen that the balancing of the budget will not be reached in time. The VAT rise, which would raise EUR4bn, would replace the previous government’s fall-back provision that any gap in the budget would be covered by percentage cuts to all of the various tax deductions, allowances, special regimes and reduced rates in Italy’s current tax system.

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

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