World Economy

Italy Passes Tax-Cutting Budget

Italy Passes  Tax-Cutting  BudgetItaly Passes  Tax-Cutting  Budget

Despite risks of breaking EU fiscal rules, the Italian parliament has passed the nation’s budget for 2016 offering tax breaks for companies and households, thus raising the government’s previous deficit targets.

The upper house of the parliament in Rome on Tuesday gave its green light to Prime Minister Matteo Renzi’s 2016 budget that eases deficit and debt reduction goals previously agreed with the European Commission, Reuters reported.

 The Senate approved the so-called Stability Law with a 162-125 vote, after the measure had passed the lower house on Sunday.

Measures in the budget law include the scrapping of an unpopular housing tax, a pay bonus for police forces engaged in anti-terrorism duties, and a €500 (around $544) voucher for 18-year-olds to be spent on books or cultural activities.

It also eliminates levies on agricultural and industrial equipment, offers tax breaks to companies that invest in machinery and equipment, and reduces the television license fee. The government argues the measures are needed to bolster economic growth.

The abolition of real estate tax on primary residences is estimated to cost the government about €3.5 billion ($3.83 billion).

The additional spending is projected to bring Italy’s public deficit to 2.4% of gross domestic product, well below the EU limit of 3%. However, it is higher than the target Renzi’s administration had initially pledged to the European Commission.

 Debt and Deficit Woes

Despite complying with EU deficit limits, Italy is still at risk of censure from Brussels because its public debt, at over 130% of GDP, is more than twice the allowed threshold of 60%.

In November, the European Commission issued a preliminary assessment warning Rome that it was at “risk of non-compliance” with 2016 eurozone budget discipline requirements. The EU executive is due to review that judgment in the coming months.

Brussels’ main concern is that Italy’s structural deficit, adjusted for economic growth fluctuations, is set to rise next year by at least 0.4% of GDP, rather than decline by 0.5% as EU rules prescribe.

But Renzi, who has become increasingly vocal against what he views as German-imposed austerity policies, argues that Italy needs to focus on consolidating a still-fragile economic recovery.

He says the deficit will remain inside 3% of GDP and that the public debt will fall next year for the first time in eight years, although in recent years forecasts of a fall in debt have repeatedly proved wrong.

The 2016 budget also includes an additional €2 billion in investments focused on cybersecurity, defense and culture, as part of a wider strategy to combat terrorism.

In an amendment to the 2016 budget, the government also created a compensation fund of up to €100 million, financed by the banking system, to help investors that have lost their savings in the government’s rescue of four local banks.

The €3.6 billion privately-fund rescue imposed losses on more than 10,500 shareholders and junior bondholders, who saw their investments wiped out, sparking public anger and putting the government under increasing pressure.

 Injecting Funds

Recently Italy has unveiled a plan to inject €160 billion to boost its economic recovery in the latest sign that a more muscular industrial policy is emerging under Renzi.

The five-year plan, using the treasury-owned investment agency Cassa Depositi e Prestiti—rebranded “Italy’s national promotional bank”— comes as the eurozone’s third-largest economy records tepid growth of 0.8% this year, raising questions about the depth and effectiveness of previous structural reforms by Renzi’s government.

“The Italian economy is growing but we need to transform a recovery that is partly cyclical into a structural one,” Pier Carlo Padoan, finance minister, said at a press conference. CDP, working with the government, could help to make that happen, he said, describing the agency as an accelerator.

Announcing a smorgasbord of intentions, CDP, which is 80% owned by the Italian Treasury and the rest by Italian banking foundations, said it aimed to become the number one player in venture capital in Italy. It would “mobilize” €117 billion, up 73% from its previous industrial plan, for investment in the corporate sector to drive growth and create jobs.

The plan also foresees an investment of €24 billion in infrastructure. Another focus would be real estate. A further €15 billion would be invested in local and regional government administration at a time when several key municipalities are heading into mayoral elections next year. CDP provides almost all the funding for Italy’s public administration.