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Italy: Renzi’s pre-election coup

Matteo RenziPut more money in ordinary people’s pockets to boost household spending while taxing banks and axing military and other wasteful spending: sounds like a political coup and it was one Italian Prime Minister Matteo Renzi pulled off consummately  on Friday.

Renzi’s cabinet passed a decree to reduce taxes for those earning between 8,000 and 26,000 euros a year by about €80 per month, starting next month. The decree “for competitiveness and social justice”, which goes into effect immediately but must be confirmed by parliament within 60 days, means almost €7 billion in tax cuts this year and €10billion in the following years.

To plug the hole in lost revenue, Italy will reduce its spending on goods and services by 2.1 billion euros this year It will also include €900million in other savings. A tax windfall from private banks are parking money inside the central bank, which should bring in €1.8 billion, was among ‘one-off measures’ he announced. Other areas he mentioned were cuts of €150 million of spending that had been earmarked for the F-35 fighter. An annual salary cap for senior officials at State-controlled companies was also set at 240,000 euros.

Renzi, the former mayor of Florence who now leads a centre-left/right coalition, also confirmed that the decree lowers the regional business tax (IRAP) by 10 percent, a reduction to be funded by an increase of taxation on capital gains from financial instruments, except for government bonds, to 26 percent from 20 percent. In 2015, the government foresees spending cuts of €14 billion, 4 billion more than the cost of the tax reductions.

Unions welcomed the income tax cut for lower earners but indicated concerns that the Government could generate sufficient revenues to cover it. Italy wants more flexibility in the EU’s fiscal straight jacket which means government must keep the deficit within 3% of GDP. As France’s Francois Hollande has already been rebuffed in response to a similar request Italy is unlikely to get a better reception.

Unions are also reassured with Renzi’s pledge that health spending won’t be touched, although the €700million contribution by local and regional government to this year’s €2.1 billion cuts – when health is the region’s main expenditure –  suggests this might not be a very robust promise.

Furthermore Renzi is threatening to withhold funds from local government if they don’t improve their budget accounting. Also, there are concerns pensioners – left out of Friday’s announcements – will end up footing part of the bill, as discussions start on another round of ‘reforms’. Finally, state broadcaster RAI is expected to contribute €150 million.

More seriously, the projections are that the tax cuts will raise growth but by just 0.3% this year. It is not clear if this boost is already incorporated in the government’s official forecast of 0.8% growth, which it reduced from 1.1% last week. But something rather more ambitious is needed.

Italy’s economy has been stagnant for close on 15 years and it is currently struggling to recover from a recession that has driven youth unemployment to over 40% and the overall rate of joblessness to a record 13%. Real per capita income in Italy, the euro zone’s third-biggest economy, is at nearly the same level it was in 1997, although people are doing alright at the top end of the income scale, with Italy ranked second only to the UK in the EU for income inequality, according to the OECD. 

Renzi might well point to his recently enacted labour reforms. But the deregulatory changes rely on boosting the ‘supply’ of labour – cheap, ‘flexible’ and with fewer rights – and don’t deal with the main issue which is ‘demand’. That is, businesses don’t want to hire because austerity policies have ensured there’s no market for their goods and services.

The pressure for a long term plan to fix Italy’s economy and deep inequalities is coming from precisely nowhere, however. The best Renato Brunetta, head of Silvio Berlusconi’s opposition Forza Italia party in the lower house, could do was to remark that Renzi’s plan  “only delivered a bunch of confusion.” As for the ‘anti-establishment’ 5-Star Movement, the funding for the tax cuts was “nothing but hot air”. Neither have a clear and credible alternative, although to its credit Beppe Grillo’s party has in the past at least raised the issue of whether Italy should stay in the Euro, which has had a devastating effect on the economy, making it uncompetitive, thanks to an over-valued exchange rate, and forcing massive spending cuts to conform with the highly constraining Eurozone debt rules.

As usual there’s little serious debate about the political choices the country could and must make in the media  – and it doesn’t help that large chunks of which still controlled directly by tax fraud Silvio Berlusconi and indirectly via his party in parliament. (It should be noted that one of Renzi’s first acts as new PM was to meet Berlusconi).

So, coming after some high profile measures that cut the ‘cost of politics’ in a country where politicians have some outrageous privileges, this week has been a brilliant political coup the former Mayor of Florence who in February seized power within the ‘centre-left’ Democratic Party. Renzi achieved this deploying the headline grabbing populist politics of Berlusconi. His tax cutting sales pitch – mostly by Twitter – will have no doubt have been quietly applauded by Silvio. It will likely have greatly enhanced his reputation and that of the Democrat Party ahead of next month’s European elections.

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