World Economy

Renzi’s Italian Budget Not Tax-Cutting

Renzi’s Italian Budget Not Tax-Cutting
Renzi’s Italian Budget Not Tax-Cutting

Two days after Matteo Renzi presented Italy’s 2015 budget, it is emerging that the prime minister’s claims of unprecedented tax cuts to revive a stagnant economy are not exactly as he described.

Renzi said on Wednesday he would put 18 billion euros ($22.9b) in Italians’ pockets through “the biggest tax cut in the history of the republic,” but official documents suggest a more modest fiscal boost, which has been confirmed by a government source, Reuters said.

Moreover some regional authorities, furious at more than 6 billion euros of cuts in their funding, have warned they will hike local taxes in response, offsetting part of the budget’s cut in income tax.

While the budget has been attacked by trade unions and city halls over the spending cuts, it has been cheered by companies who welcomed Renzi’s announcement of a 5 billion euro cut in the regional company tax IRAP.

However, budget documents show the cut in IRAP includes a 3 billion euro reduction already effected in April, something Renzi omitted to mention in his news conference, meaning an additional cut of just 2 billion euros.

Renzi announced on Wednesday he was scrapping the component of IRAP levied on companies on the basis of the number of workers they hire, but the documents show this will only refer to workers hired on permanent contracts. In recent years more than 80 percent of workers have been hired on various forms of temporary contracts.

The budget also increases the tax rate on income from financial investments and pension funds, meaning the net result of the overall tax changes is more complex than portrayed by the 39 year-old former mayor of Florence.

The 15 billion euros of spending cuts in the budget also look far from guaranteed after Renzi discarded the unpopular but carefully targeted cuts proposed by Spending Review Commissioner Carlo Cottarelli, who later announced his resignation.

Renzi replaced Cottarelli’s targeted cuts with mainly broad reductions in ministerial budgets and funding for local authorities.

This is the traditional approach in Italy which often yields limited results in terms of savings and fails to differentiate between waste, front-line public services and investments.