The measures announced by the Italian government are a step in the right direction, although the reduction of the cost of labour remains marginal. The decision not to resort to legislative decrees means that the actions taken will not come…
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into force immediately, but the mix of measures should aid disciplined support in Parliament from the majority coalition, and will raise GDP growth in 2014H2. The most intricate issue will be that of compliance with the stability and growth pact: the structural deficit has stopped improving, and meeting debt criteria seems to be becoming increasingly difficult.
– In Italy, the Council of ministers has approved an important set of reform measures, mostly addressed to the labour market and to the fiscal system. As regards the former labour market, a legislative decree will extend the duration of the first temporary work contract from 12 to 36 months, placing a 20% cap on the number of temporary contracts in relation to the total headcount, and introducing several simplifications. The rest of the labour market reform (single contract, unemployment benefit instruments) will be covered by a draft by-law. However, the first step already seems to be attempting to balance the enterprises’ need for flexibility with the calls for greater employment stability for workers under non-standard contracts.
On the fiscal front, tax rebates will be introduced for employees with incomes of less than 25 thousand euros a year, for a total worth in full swing of 10 billion euros (6.6 billion in 2014, starting in May), a 10% reduction of the Irap tax, and a hike of the withholding tax on financial income, from 20% to 26% (to fund the Irap cut). The process of paying off arrears owed by the public administration should also continue, albeit through mechanisms aiding the discounting of invoices by the banking system, with the activation of government guarantees and the possibility of selling credits to the CDP (Cassa Depositi e Prestiti). Other measures are addressed to social housing and rents, the cost of energy for SMEs, and the school building plan. The tax rebates are understandably more addressed to increasing the net income of workers, rather than to the reduction of the cost of labour, limited for the time being to a small Irap cut; however, this choice should aid the passage of the entire package of reforms through Parliament, gelling the majority and winning the approval of the unions. Incidentally, we expect the tax cuts to boost consumer spending in the second half of 2014, raising 2014 GDP by at least 0.2% from our current estimate of 0.5%.
– The government intends to fund the measures by leveraging the spending review (three billion in savings considered as achievable by Commissioner Cottarelli), savings on interest spending (2.3 billion), and higher revenue from VAT tied to the invoicing for the payment of PA arrears. The housing plan, and the school building plan, will be funded by drawing on unused previous appropriations. Other aspects are the increase of the public deficit, from 2.6% estimated under current law by the European Commission, to a level in any case lower than 3%. The Finance Minister, however, has said that all temporary funding will be replaced next year by spending cuts.
– Relations with the European Union will be the most delicate issue. While the deficit ceiling should be respected, the structural correction initially provided for by the medium-term fiscal plan has been struck off, resulting in the debt reduction clause imposed by the new stability pact and by the constitution being ignored once again. This will risk rekindling debate on the need for market pressures to encourage budget discipline, used in recent years to deny the concession of support measures (see German criticism of OMTs). Also, the Italian government will find itself negotiating not on the basis of reforms in the implementation stage, but of mere reform proposals. At this point, a crucial aspect could be the swift Parliamentary approval of the reform measures, in addition to guarantees that the fiscal consolidation path, and with it the reduction of the debt ratio, will be resumed starting in 2015, once the recovery will have consolidated.
Appendix
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