2. Measures taken by the Letta Cabinet: economic policy
Tax policy
Suspension of the first installment of the real-estate property tax on
first houses (a comprehensive reform of this tax is due within
August)
Postponement of the 1% increase of the ordinary VAT rate (from
21% to 22%) from 1 July to 1 October (no funding for a
suppression of the VAT increase in the long run was found)
Jobs
Limited amendments to the 2012 Monti/Fornero labour market
reform to provide for more flexibility
€1.5 billion allocated in a 4-year period to cut the tax-wedge
No structural reform in the areas of
welfare spending, Public Administration, civil justice,
Reduction of the sovereign debt stock.
3. Legislative initiatives taken
by the Letta Cabinet: reform of the State
Process towards a Reform of the Constitution started in June –
deadline for the completion of the process: December 2014
Legislative proposal to suppress one of the 4 levels of
Government (Provinces)
Legislative proposal to suppress public funding to political
parties
No agreement reached on a reform of the voting system.
4. The effects of the closure of the excessive
deficit procedure pending on Italy
On 29 May, the European Commission officially recommended the closure
of the excessive deficit procedure pending on Italy
Does this allow Italy to benefit from enhanced fiscal flexibility?
No “Golden Rule” applying to public investments
Temporary deviation from the close-to-zero target, to enable public
investments co-funded by the EU
Obligation not to trespass the 3% deficit/GDP threshold
Confindustria’s latest forecast on Italy’s deficit in 2014 is 2.6% of GDP
(Monti’s forecast was 1.8%)
This would mean approx. €6 billion (0.4% of GDP) additional spending
allowed for co-funded investments and no additional funds for tax cuts
6. Labour market after the Fornero reform
Freedom to fire extended (but no automatic compensation scheme)
Limited restrictions to non-permanent contracts (some of which
repealed by Letta)
For the first time in Italy, an insurance scheme for involuntary
unemployment was introduced on an individual basis, irrespective
of the size of the company they previously worked for
Implementation of the reform slowed down by:
Budgetary constraints: €2 billion additional spending
Pressure from stakeholders:
Aspi seen as a threat by those workers employed under full-time
permanent contracts in companies with more than 50 employees,
who are entitled to the traditional Redundancy Fund
Apsi was partly funded through an increase in social security
contributions, thus raising the cost of labour for businesses
Dualism is still there.
7. Liberalising the Economy?
Cost of energy: still higher than anywhere else in Europe
Incentive schemes for the production of energy from renewable
sources is ultimately funded by final consumers through the
electricity bill
Cost of fuel: Monti’s attempt to forbid/severely limit the scope of
exclusive supply contracts between petrol stations and oil companies
failed
Cost of transport
Reform of highway tolls watered down by the Parliament: price cap
mechanism will come into force for Autostrade per l’Italia in 2038!
Independent Authority on Transport still not operational
Cost of insurance
The Authority failed to tackle frauds
8. Reforming the tax system?
Input coming from EU and international institutions: shifting the tax
burden from labour/corporate income to consumption and real estate
properties
Is this happening? Not really
VAT was raised from 20% to 21% but VAT revenues dropped by
€2billion in 2012 because of the decline in domestic consumption
No political will to tax large real estate properties (why still
debating on first houses?)
Tax wedge on labour (income taxes + social security contributions)
was actually increased to fund the labour market reform
An additional tax on businesses is there at the Regional level
(IRAP) to fund the Healthcare Service
But most importantly…
Monti failed to implement a spending review.
9. Government spending is out of the Government’s control
Spending cuts vs. Rationalisation of public spending: an example
Monti cut the Government’s funding to the NHS, but the NHS is
managed at the Regional level
The Government made provisions for a standardisation and an overall
reduction of spending for the purchase of intermediate goods (e.g.
medical devices) across the Regions
The market fragmentation resulting from the regionalised healthcare
service prevents the NHS to achieve this objective
The Regions failed to standardise costs, but the spending cuts
entered into force
The Regions are failing to recover from their healthcare deficits
Healthcare deficits are funded through an increase of the labour
income tax (IRPEF) and IRAP
10. Lesson learned
FIRST: you reform the institutional framework
(e.g. repealing the regionalised healthcare)
SECOND: you rationalise the spending,
only then you can cut taxes
