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Rehn Praises Italy's Fiscal Reforms

by Ulrika Lomas,, Brussels

02 December 2011

A broadly favourable report has been given to the Italian government’s existing deficit-reducing measures by a review team led by Olli Rehn, the member of the European Commission responsible for Economic and Monetary Affairs.

The report, issued on November 29 and entitled ‘Addressing Italy's high-debt/low-growth challenge’, records that Italy's twin challenges of high public debt and low growth pre-date the global financial crisis, rather than follow from it. Italy had maintained a more prudent fiscal stance during the crisis but remains “vulnerable to a loss of investor's confidence, mainly because of its failure to introduce much needed ambitious fiscal and structural reforms in the past decade”.

It is confirmed that the government’s policy goal of a balanced budget by 2013, implying a target for the primary surplus of more than 5% of gross domestic product and a declining public debt, is “robust to stress tests”. In addition, a proposed balanced-budget constitutional amendment, if properly designed and implemented, would enhance the value of the fiscal policies that have already been established.

It is noted, however, that additional steps are necessary “to secure the announced deficit targets while raising the equity and efficiency of fiscal policy”. In that respect, the "safeguard clause" - envisaging the scaling back of tax expenditures or increases in indirect taxes if the tax and social assistance reform fails to be implemented on time and/or does not yield the anticipated savings - should be fully specified upfront, by detailing the precise measures and the triggers for their activation.

On the other hand, with the crisis in the euro area, it is also said that the implementation of reforms to unleash Italy's growth potential has become even more urgent, and that the strong adjustment in the country’s fiscal balance should be supported by reforms to make fiscal policy more growth-friendly.

The report notes that the tax burden in Italy is very high and not fairly distributed, because of widespread tax evasion. At the same time, public expenditure is inflexible reflecting in particular a large share on pensions, where recent reforms - while essential to buttress the system's long-term actuarial balance - have very limited payoff in the short-to-medium term.

Therefore, in designing a further package of measures, Rehn said that expenditure restraint should receive highest priority, while the tax burden should be shifted from labour to consumption and immovable property. In doing so, “the relative weight of transaction versus recurrent real estate taxation should be reviewed in favour of the latter, and real estate cadastre values should be updated.”

Tax evasion and the cost of tax compliance should also be reduced, the report said, recommending that “the fight against tax evasion should be decisively enhanced, building on progress made so far, including by drastically lowering the threshold for electronic payments, increasing reliance on indirect indicators of undeclared income, and improving the cooperation between different levels of government on tax administration issues.”

Rehn’s report concludes that Prime Minister Mario Monti’s new government “has the know-how to design a comprehensive and coherent reform package, one that can kick-start growth and restore confidence. To help reverse market mood, the key reforms should be front-loaded.”

It is, in fact, known that the government is indeed urgently putting together a new package of growth measures that should contain the presaged reforms to shift Italian tax burdens away from individuals and companies. Monti, in parliamentary remarks to obtain a vote of confidence, had noted that, in the past, Italy had relied too much on increasing taxes on employees and businesses to balance its public finances, and that changes had to be made to provide some space for economic growth in the private sector.

TAGS: individuals | compliance | tax | economics | business | European Commission | value added tax (VAT) | sales tax | tax compliance | property tax | fiscal policy | employees | budget | corporation tax | Italy | individual income tax | Europe

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