ROME--Italy's government on Friday approved the country's first
sweeping income tax cuts in more than a decade, giving up to EUR80
a month in extra cash to three-quarters of the workforce.
The cuts are worth EUR10 billion over a year, and will go into
effect next month. Prime Minister Matteo Renzi has said the move is
aimed at voters going to the polls for the European parliamentary
elections. It is also meant to boost domestic demand and ease
Italy's dependence on export-led growth, at a time when foreign
demand is showing signs of slowing.
Mr. Renzi, whose Democratic Party is currently enjoying a record
high in opinion polls, is making a high-stakes bet with the move,
as his administration hasn't identified all the budgetary savings
required to fund the tax cuts on a permanent basis.
"These aren't one-off tax cuts, they're structural," Mr. Renzi
said.
He outlined EUR6.9 billion in targeted measures that would help
lessen the impact on the state. Among those measures are a maximum
salary cap of EUR240,000 salary cap for public servants and EUR2
billion in savings on purchases by the government.
The government will also oblige local administrations to cut
their outlays and make all their expenditures public or face
reduced transfers from the central government. Italy's press has
identified a number of cases where local politicians used public
money to purchase items ranging from caviar to underwear.
But Mr. Renzi's plan also relies on funding from a windfall levy
on capital gains for commercial banks in exchange for allowing them
to value their shares in the Bank of Italy at a higher level.
The income tax cuts will result inasmuch as EUR1,000 more in
annual take-home pay for salaries of up to EUR28,000 a year.
Italian employees face typical tax rates of 50% and higher when the
country's stiff payroll contributions are included.
Focusing all the tax cuts at the medium and lower end of the
wage spectrum should boost consumption, which the Bank of Italy
said earlier Friday remains 7% below its level in 2007.
The last major tax cuts were in late 2000, when a center-left
government on the eve of elections--won by conservative tycoon
Silvio Berlusconi--approved the equivalent of EUR30 billion in tax
reductions.
At the time, however, Italy's economy was growing at a 3.7%
annual rate, the budget deficit was 0.9% of gross domestic product,
and the public debt was 109% of GDP. Today, Italy's economy has
just begun a modest recovery after a five-year crisis that has
knocked GDP down by 9% and pushed the debt level up to 133% of
GDP.
While economists agree that channeling resources to people most
likely to spend it will maximize the economic impact, many say that
a more effective intervention would have been to cut a business tax
levied on payrolls, as that would lower Italy's labor costs and
bolster employment prospects in the medium term.
The government is lowering business taxes modestly this year but
has vowed to focus on that in 2015.
The euro area's fiscal rules make it harder for Rome to achieve
that goal without further spending cuts, which could themselves
have adverse economic effects. Earlier this week Economy Minister
Pier Carlo Padoan sent a letter to the European Commission
explaining Italy intends to have a looser fiscal policy than the
rules formally require.
He said Italy's economy faced "exceptional circumstances" due to
a financial crisis that was born elsewhere and ultimately led to a
domestic credit crunch as northern euro-zone banks transferred to
the European Central Bank their exposure to the financially
stressed euro-zone countries. Italy's economic output, measured in
GDP per capita, has retracted even more than the output in Greece,
and has regressed to its level in 1997, according to the
International Monetary Fund.
Mr. Padoan accused Brussels of using too harsh a calculus in
assuming how much economic potential Italy has lost and noted the
government is planning other measures to simplify business
activity.
The new tax cuts and other measures should have a positive
structural effect and "put the Italian economy on its fastest
growth path in 20 years," he said Friday.
Write to Christopher Emsden at chris.emsden@wsj.com
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