Italy's new Prime Minister Matteo Renzi has proposed a sweeping package of tax cuts, in a bid to revive the country's economy. In his first full news conference, he insisted the package would not breach EU budget deficit limits.
Mr Renzi said income tax would be reduced by a total of €10 billion annually for 10 million low and middle income workers from 1 May. The 39-year-old said his agenda was the most ambitious Italy had ever seen. "This is one of the biggest fiscal reforms we can imagine", the former mayor of Florence told reporters after a cabinet meeting that approved the measures.
Mr Renzi has made clear that job creation and growth, rather than austerity, will be the focus of his government. He said the detail of the tax cuts would be set out in the government's annual forecasting document released next month, and made clear the budget deficit goal would be raised, while insisting that it would stay below the EU's ceiling of 3 per cent of GDP. Italy is currently aiming to keep its deficit to 2.5 per cent, after 3 per cent in 2013.
"We will respect our European commitments", he said, adding that he expected EU authorities would take note of Italy's reform efforts in judging its public finances. He said the tax cuts will be financed by reductions in central government spending, extra borrowing, and by resources freed up thanks to the recent fall in Italy's borrowing costs.
His predecessor Enrico Letta paid off around €22 billion of the state's debts to private suppliers in 2013, and Mr Renzi promised to pay off the remaining €68 billion by the end of July, though he did not explain how he would pay for this. The Economy Minister Pier Carlo Padoan later admitted Italy would have to obtain permission from European authorities if its plan to pay off these debts leads it to breach EU borrowing limits. "I won't disguise the fact that we don't have a very clear idea of how much the debt arrears which can actually be mobilised amounts to", he told a news conference.
Mr Renzi, who heads a broad coalition, was speaking after the lower house of parliament approved a new electoral law designed to ensure more stable and long-lasting governments. After securing a comfortable victory, Mr Renzi tweeted "Politics one, Defeatism nil".
An FT editorial (subscription) on 13 March says however that Renzi’s medicine will not cure Italy.
Mr Renzi aims to fund some of his giveaways through a combination of spending cuts and higher taxes on capital income. This makes sense. Italy’s public administration is notoriously inefficient. There is much fat to be trimmed without affecting the quality of services. Taxes on investment income in Italy are generous by European standards. That the extra revenue levied on savings will be used to give some breathing space to businesses should help to boost growth.
This cash, however, will only fund a portion of the promises that Mr Renzi has made. He has earmarked €7 billion of spending cuts, but as a senior civil servant has made clear this week, it will be hard to squeeze more than €3 billion out of the system. True, thanks to the sharp reduction in interest rates, the Italian treasury may be able to fund its debt more cheaply than it had planned. This would free some resources. But, as the prime minister conceded on Wednesday, some of the funds needed will have to come through extra borrowing.
The idea that Italy wants to push above the deficit target forecast by the EU – 2.6 per cent of national income – will send shivers down the spine of policy-makers in Brussels and Berlin. Italy should try to cut its €2 trillion public debt, not add to it. Yet were Mr Renzi’s measures able to jump-start the economy, the fiscal outlook would improve too. The central question is how he will spend the money that he intends to borrow.
Mr Renzi has to find other ways to make Italy more competitive. One is to reform the labour market, which gives excessive protection to powerful insiders at the expense of the young. On Wednesday, alongside his fiscal plans, Mr Renzi announced changes to the rules governing apprenticeships and short-term contracts. These should make it easier for companies to hire. But the prime minister should go further, for example increasing the flexibility companies have to set their own wages rather than having to rely on countrywide agreements.
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