Italy Cabinet Passes Tax Cut Amid Concerns on EU Approval

Italian Prime Minister Matteo Renzi’s cabinet passed an expansionary budget plan worth 36 billion euros ($46 billion) for next year aimed at revamping the country’s economy with tax cuts and additional spending.

The plan, which has raised doubts among economists and experts on whether it’s compliant with EU rules, includes 18 billion euros in tax cuts, as well as new expenditure to finance, among other things, research, unemployment benefits and education.

This is ’’the biggest reduction in taxes ever done by a government in the history of the Republic,’’ Renzi said at a press conference late yesterday in Rome, adding that now employers have no excuses to avoid hiring. He also addressed questions about the sustainability of the budget saying Italy is “totally within the rules, as defined by the EU. If there are any specific issues we will respond.”

The plan’s main sources of funding are 15 billion euros in spending cuts and 11 billion euros from an increase in next year’s budget deficit which will go up to 2.9 percent of gross domestic product, from 2.2 percent. Among other sources are 3.8 billion euros from efforts against tax evasion and ’’less favorable’’ taxation on foundations and pension funds, Renzi said. Tax cuts include a reduction of the IRAP regional business tax as well as the confirmation of a 80-euro tax reduction for lower earners.

Structural Goal

Last month, the government postponed its structural balanced budget target by one year to 2017, saying the move was justified by a worse-than-expected economic slump. The budget plan presented yesterday will have to be approved by the European Commission, which wants Italy to reduce its deficit in order to tackle a debt of over 2 trillion euros, Europe’s second biggest.

“We are with the rules, we use the flexibility within the rules, and we will have an open dialog with the commission as usual,” Finance Minister Pier Carlo Padoan said earlier this week in Luxembourg.

Renzi, who has insisted the European Union use flexibility in its budget rules given the worsening economic scenario, is not alone in Europe in facing budget difficulties. French President Francois Hollande is also under pressure as lack of growth distances the country from deficit-cutting commitments made earlier in the year. France now expects its budget deficit to rise this year for the first time in half a decade, and doesn’t see the shortfall shrinking to the EU limit of 3 percent of gross domestic product before 2017.

Italy’s proposed spending cuts are “unsustainable,” Stefano Fassina, a lawmaker and former economic affairs spokesman for Renzi’s Democratic Party, said in an interview with la Repubblica today. The cuts will affect “families as school cafeterias will be hit, will have an impact on commuters as public transport will be cut, on people in need as welfare will be reduced,” he told la Repubblica.

Italy’s national statistics office Istat confirmed yesterday that the country hasn’t grown for the past three years. Renzi’s administration revised its economic forecasts for this year and the next to a 0.3 percent contraction and 0.6 percent expansion respectively, compared with previous estimates of growth of 0.8 percent and 1.3 percent.

The impact of the measures passed yesterday will be stronger in 2016 as they “begin to kick in,” Padoan said.

Italy’s 10-year yield rose 4 basis points to 2.46 percent today.

(Source: Bloomberg)