Presentation of the national Budgets marks the opening of the arduous negotiation process between governments and European authorities. In Italy, the government has opted (understandably) to make support of the economic cycle a priority over formal respect of the rules. A margin for negotiation does seem to exist……
Intesa Sanpaolo – Research Department – For professional investors and advisers only
The Italian 2015 Budget seems to be of broader scope than expected on the eve of its presentation. The press conference brought the announcement of a gross Budget worth 36 billion euros, although net of the measures already included in previous legislative actions the total should amount to just over 30 billion. The Budget features the appreciable attempt to support demand by easing fiscal pressure, and in particular through a reduction in the cost of labour for enterprises. On the whole, the measures aimed at easing the tax burden are worth 14.5 billion euros, of which around 10 billion “added” compared to 2014. This could result in fiscal pressure being cut by around half a percentage point (from a present rate of 43.3%).
The measure aimed at reducing the fiscal wedge, together with the labour market reform, may have structural effects on competitiveness and employment.
Confirmation of the Irpef bonus, worth 6.8 billion euros (net of the 2.7 billion already funded), was widely expected. Deductibility of cost of labour from the Irap tax is worth 6.5 billion, but will have a net effect on state finances of 5 billion. The striking off of welfare contributions for the first three years on new open-ended labour contracts is worth more than expected, at 1.9 billion (although the cost in 2015 should be smaller, as the measure is scheduled to come into force with the labour market reform, i.e. in the best of cases next Spring). A late addition to the Budget is the new simplified taxation regime for self-employed people with revenues of between 15k and 40k euros (worth 800 million), whereas childsupport tax deductions were widely expected (500 million), as also tax breaks on research (256 million), and the extension of the so-called “eco-bonuses”. Expansionary measures also include the possibility for workers to receive advances on their staff severance fund, at a limited cost for the state. Also confirmed is the funding of new redundancy schemes worth 1.5 billion and the easing of the internal Stability Pact for municipalities, worth one billion euros. The Education Plan (stabilisation of temporary teachers and school-work schemes) will weigh on national finances by around 500 million euros next year, by a hefty 3 billion starting in 2016, and by over 4 billion in full swing from 2017 onwards. Lastly, the Budget funds nondeferrable spending worth a massive 6.9 billion euros, and avoids the triggering of the safeguard clause contained in the previous Stability Law (3 billion cut to Irpef tax detractions).
As regards funding, savings resulting from the spending review have been announced at 15 billion euros. This sum, however, includes the 2.7 billion already provided for by the Irpef decree in April, therefore the additional spending cuts included in the Budget amount to just over 12 billion. For the time being, over half of the cuts will be borne by local administrations (Regions 4 billion, Provinces 1 billion, Municipalities 1.2 billion); of the remainder, 4 billion should come from spending cuts targeting Ministries, and 2.1 billion from further savings on the purchases of goods and services. Funding is completed by revenue increases: 3.8 billion from the fight against tax evasion, an additional 1.2 billion from the taxation of financial income (banking foundations, pension funds, life insurance policies), and 1.6 billion from nontax one-off revenues (1 billion from slot machine licence holders and 600 million from broadband operators).
This is the hottest and most critical front. As we write, no details have been provided on the strategy that will be pursued to achieve the savings. The further cuts to transfers to the local administrations outlines the risk that they may be balanced at least in part by higher local taxes, and for the time being it is not clear whether they will be aimed at all the Regions, regardless of their efficiency. Lastly, targeted revenues from the fight against tax evasion (3.8 billion) seem ambitious (in 2013, additional revenue compared to the previous year was limited to 600 million euros).
The Budget is certainly prone to create tensions with Brussels, as the Italian government has confirmed a 0.1% correction of the structural balance, as opposed to 0.3% required by the Commission; however, on the spending side, the government has provided for a 3.4 billion “reserve” or “emergency buffer”, which corresponds exactly to 0.2% of GDP, and which could be used if the Commission firmly reasserts its request for a stronger correction. The match will also be played out on the credibility of the spending cuts, on which sufficient details still have not been disclosed. However, Italy seems more qualified than other countries (i.e. France) to invoke exceptional circumstances (recession, structural reform).
Source: BONDWorld.ch
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