—Potential EU delay of new fiscal rules poses more trouble ahead
By Silvia Marchetti
ROME (MaceNews) – Italy’s government is working on a EUR30 billion budget plan for next year in a bid to cut income taxes for low earners but officials warn that resources are very limited and they worry that a potential delay in the approval of new fiscal rules by the European Commission could make the task harder.
Italy’s new budget “is expected to be cleared by end of September, alongside updated growth and deficit targets. Our cornerstone remains a series of ambitious … tax cuts to support low earners and struggling firms,but first we need to locate where to raise the necessary resources, and so far we do not have much leeway,” said a ruling coalition official.
Italian Premier Giorgia Meloni faces a conundrum, with little fiscal space ahead. After Italy piled up hundreds of billions of euros in public debt to tackle the pandemic, she can’t afford to ask parliament for yet another deficit spending decree that would add to borrowing.
And she certainly can’t count on what her cabinet members call the European Commission’s “wishful thinking” that Eurozone’s fiscal rules will be eased for good and applied across the bloc quickly.
“September is a crucial month. The European institutions may not timely approve the reform of the Stability and Growth Pact (SGP) that eases fiscal pressure on member states. The pact was suspended during COVID but will resume at end of this year if a reform is not implemented. We must make post-COVID fiscal flexibility permanent,” warned another government source.
This reform is still under discussion within the Eurozone’s finance ministers group.
The reform of the Stability and Growth Pact envisages new ways to calculate national deficits net of investment that will boost long-term growth potential. It has been under discussion for months, with little progress. The SGP reform objective is to boost investment in environmental-friendly projects and to exclude only strategic investments from the 3% deficit-to-GDP threshold, particularly those made in infrastructure and green technology.
If tax cuts for low earners become a structural, permanent measure that supports consumption and the economy, Meloni is confident the commission could consider it as an investment in long-term growth, say government sources.
If the reform is not speedily implemented, Meloni’s cabinet will have to settle with a more modest budget plan, for which though officials have no precise figure yet. The fiscal reform must be implemented by year-end, or the EC will resume pre-COVID tight fiscal rules (deficit at 3% of GDP; debt at 60% of GDP) when assessing country-specific budgets.
According to government sources, were Italy to rely solely on its resources without the eased rules from Brussels, money to fund the proposed tax cuts would come from a crackdown on tax dodgers and a thorough privatization plan focused on selling state-owned, or partly state-owned companies, except those of strategic national and safety interest.
The government also wants comprehensive tax reform aimed at the slimming down of tax breaks. The goal is to cut down on the hundreds of tax bonuses, tax credits, tax exemptions, and tax deductions (for instance, for health spending) now part of Italian law while keeping just those that support low-wage families and workers. This tax reform is expected to be a key measure of the upcoming budget plan.
All previous governments have unsuccessfully attempted to abolish many of these fiscal privileges, most making minor progress in cutting just a few.
According to a report by the Italian parliament there are currently 500 different kinds of tax ‘privileges’ in Italy that cost roughly E61 billion each year. Sources argued that reducing these and simplifying the whole system is a tough task which will require time and can only be done gradually.
“The European institutions have repeatedly urged us to reduce the amount of exemptions and preferential fiscal treatments, but on the other hand they must help us by granting Rome more fiscal leeway for our next budget, speeding up the adoption of more flexible, permanent fiscal rules, said an official.