Italy approves 2016 tax-cut budget

Italian Parliament confirmes 2016 tax-cut budget despite European Union pushing fiscal rules to limit

Photo by: Reuters
Photo by: Reuters

Italy's Prime Minister Matteo Renzi arrives at a European Union leaders summit in Brussels, Belgium on December 18, 2015

The Italian parliament on Tuesday gave its final approval to Prime Minister Matteo Renzi's tax-cutting 2016 budget which the European Commission says risks breaking EU fiscal rules.

The budget's hallmark is the abolition of housing tax on primary residences, reviving a flagship policy of former Prime Minister Silvio Berlusconi at a cost of some 3.5 billion euros ($3.83 billion) to the state.

It also eliminates levies on agricultural and industrial equipment, offers tax breaks to companies that invest in machinery and equipment, and reduces the television licence fee.

In the last few weeks Renzi also introduced an 80-euro-per-month salary "bonus" for policemen and soldiers and a one-off 500-euro handout for all 18-year-olds to be spent on cultural activities, such as cinema trips.

Critics accused him of gimmicks aimed at winning votes, but he said the moves were justified by the Nov. 13 militant attacks that killed 130 people in Paris.

He said security forces must be rewarded for their extra efforts and "every euro spent on security should be matched by a euro spent on culture."

The budget was passed in a vote of confidence in the Senate by 162 votes to 125, comfortably inside the end-year deadline. It had already been approved by the Chamber of Deputies.

It eases deficit and debt reduction goals previously agreed with Brussels, which objects that with the economy finally recovering after a long recession Italy should if anything be accelerating fiscal consolidation, rather than slowing it down.

Italy's public debt, at 133 percent of gross domestic product, is the highest in the euro zone after Greece's.

The Commission said in November that Italy was among four euro zone countries whose budgets risked breaking EU rules.

It postponed a definitive judgment on the budget until May, while urging Rome to take corrective action during its passage through parliament. However, rather than tighten the budget, parliament has made it more expansive.

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 percent of GDP, rather than decline by 0.5 percent as EU rules prescribe.

Renzi aims to keep Italy's headline fiscal deficit inside the EU's 3 percent of GDP ceiling in 2016, but when he presented the budget in October he hiked the target to 2.2 percent from 1.8 percent previously, to fund his tax cuts.

This month he raised it again to 2.4 percent - compared with a targeted 2.6 percent this year - partly to accommodate the handouts for security forces and 18 year-olds.

He dismissed accusations that he was currying favour with voters ahead of important mayoral elections next year in Italy's main cities, and has stepped up combative tones against what he sees as German-imposed fiscal rigour.

"Let's be frank...Europe has to serve all 28 countries not just one," Renzi said in an interview in the Financial Times on Tuesday, in reference to Germany.

Renzi argues that Italy needs to focus on consolidating a still-fragile economic recovery.

He says the deficit will remain inside 3 percent 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.

In another contested move, the budget raises the ceiling on the use of cash transactions to 3,000 euros from 1,000 euros. Renzi said this would make spending simpler, while critics said it risked increasing already rampant tax evasion. ($1 = 0.9148 euros)