Italian Prime Minister Matteo Renzi. Photo: ReutersItalian Prime Minister Matteo Renzi is presenting a tax-cutting 2016 budget today which pushes EU fiscal rules to the limit and is likely to be more popular with voters than with the European Commission.
A significant part of the tax cuts will be funded by extra borrowing and the budget slows the pace of deficit and debt reduction that Italy had previously agreed with the Commission.
As the economy is already staging a recovery after a three-year recession, the EU’s economic orthodoxy dictates that now would be a good time to step up budget tightening rather than relax it.
Instead, Mr Renzi, who has made tax cuts a rallying cry ever since taking office last year, insists he deserves extra budget “flexibility” as a reward for reforms passed in areas such as the labour market and the education system.
“The budget is technically exceptional,” he said in a radio interview this week. “For the first time taxes are being cut in Italy.”
He points out that while the pace of deficit reduction is slower, the fiscal gap will narrow next year thanks to record low interest rates on government bonds, and remains comfortably below the EU limit of three per cent of national output.
Last month the government hiked the 2016 deficit goal to 2.2 per cent of output from 1.8 per cent and marginally raised the forecast for public debt, the highest in the eurozone after that of Greece, to 131.4 per cent from 130.9 per cent.
The budget does not appear to meet EU rules on either debt reduction or the “structural” budget deficit, adjusted for growth fluctuations. Instead of cutting the structural deficit by 0.5 percentage points as the rules prescribe, Italy is proposing to raise it by 0.4 points.
Like last year, when Rome agreed to additional cuts of about €5 billion, a compromise is likely to be reached in the next few weeks before the Commission signs off on the budget, which must be passed by parliament by the end of the year. It is not just the headline numbers of the budget that are raising eyebrows in Brussels, but also its composition.
Renzi has said he will abolish a tax on primary residences, scrap levies on agricultural and industrial equipment and also reduce the main corporate tax IRES, at a cost of at least €5 billion to the state.
The bulk of that will come from the abolition of a housing tax, TASI, reviving a flagship policy of former centre-right prime minister Silvio Berlusconi.
The Commission says high-tax countries like Italy should instead increase property levies to make room for reductions in labour taxes, which it says would have a better impact on employment and growth.