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Italy To Bring Forward Emergency Anti-Crisis Measures

by Ulrika Lomas,, Brussels

15 August 2011

The Italian government is in the process of formulating ‘anti-crisis’ measures, to be approved at a ministerial meeting planned for as early as August 16, and then presented to a recalled parliament, which will accelerate the balancing of the country’s budget and will, hopefully, be more acceptable to the financial markets.

At a further meeting between Italy’s Premier Silvio Berlusconi, the Minister of the Economy Giulio Tremonti and other leaders from industry, business and the trade unions, Tremonti re-confirmed that the new objective is to bring forward the achievement of budgetary balance by one year to 2013, compared to the target of 2014 agreed with the European Union (EU) before the financial markets' latest round of doubts over Italy’s ability to resolve its fiscal deficit and debt problems.

However, it was also confirmed that, while it had been disclosed previously that the most substantial measures were to be effective in the final targeted year, significant deficit reductions will now also be looked for in 2012.

The measures will be "restructured" such that, while the ratio of Italy’s fiscal deficit to gross domestic product is still expected to reach 3.8% this year, the previously-targeted ratio of 2.7% in 2012 has been reduced to between 1.5% and 1.7%, leaving around 1% of spending cuts or revenue hikes to be found next year.

Measures to provide additional revenues later this year and next will need to be in addition to the pension reforms and the social security measures already formulated, as, although the expenditure reductions from the latter will be accelerated, it is unlikely that additional funds can be obtained from them, given the implacable opposition from the trade unions and some political quarters.

While everybody seems to agree that there should be further reductions in public spending and further attacks against tax evasion, the government’s decisions on where to provide additional revenues are seen as difficult, particularly given the divergent and unspecified nature of the various demands from all sides for measures that should be rigorous in reducing the fiscal deficit, but should also provide a stimulus to economic growth.

In the words of Emma Marcegaglia, president of Confindustria, the Italian business federation, “this budget should be rigorous and equitable, with significant reductions in the complexity and cost of the public sector, and should remain true to a principle of equity, such as increasing the traceability of payments so that action against tax evasion would be reinforced. Then, measures, such as privatisations, infrastructural improvements, tax simplifications and efficiencies in public administration, are also necessary to sustain growth in the economy.”

However, as far as specific revenue-producing tax measures are concerned, Marcegaglia seems to be against one of the suggestions – a wealth tax – that, it is said, could produce immediate returns, and is present elsewhere in the EU. Others look upon such a tax, on all of a person’s assets apart from first residences, as a means of counterbalancing the sacrifices being asked in relation to pensions and social security.

It is more certain that the government’s proposals will act to “harmonise” withholding taxes on financial income – a policy that is part of the proposed tax reform framework formulated by the government at the same time as its previous budget early last month. The objective would be that taxation of all financial income (including capital gains, but excluding income from government bonds and pension funds) would be 20%. Interest from savings and current accounts with banks, and on capital gains, is currently taxed at 12.5%, and it is said that such a “harmonisation” would provide over EUR1.8bn (USD2.5bn) in additional tax revenue next year.

In addition, as a small movement towards reducing corporate tax burdens, a further suggestion could be to produce a small reduction to the regional tax on production (IRAP), possibly balanced (as was presaged in the fiscal reform framework) by an increase in the normal rate of value added tax.

TAGS: capital gains tax (CGT) | tax | investment | economics | business | pensions | value added tax (VAT) | fiscal policy | public sector | budget | tax rates | withholding tax | social security | Italy | tax reform

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