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Thursday, March 27, 2003

Italy Implements It's Own Tax Cut

The Italian government just implemented its own version of the tax cut. It is difficult to see the logic behind this when Italian growth is faltering (only 0.4% growth last year, and most probably negative growth this one).

Italy's parliament Wednesday gave final approval to a wide-ranging tax cut plan through which the centre-right government hopes to give the economy a boost before its term expires in 2006. Prime Minister Silvio Berlusconi's government has already started to implement some tax cuts with its 2003 budget, which has raised concerns at the European Union that Italy will run a higher-than-expected deficit. The 2003 budget focused on cuts to low-income families that will cost the state around EUR5.5 billion. The corporate tax rate was trimmed to 34% from 36%, costing the state some EUR2.0 billion. With the reform approved Wednesday, the government aims to cut and simplify the income tax regime to include just two brackets by 2006 - at 23% for families earning up to EUR100,000 and 33% for those on a higher income. Currently, the income tax brackets are set at 23% on income below EUR15,000; 29% on income between EUR15,000 and EUR29,000; 31% between EUR29,000 and EUR33,000; 39% between EUR33,000 and EUR70,000; and 45% above EUR70,000. The corporate tax rate will be trimmed another percentage point to 33% by 2006. The government has said the speed of the tax cuts will depend on how the economy is performing. Growth in Italy, the euro-zone's third-largest economy behind Germany and France, is stagnant. Gross domestic product expanded a meager 0.4% in 2002, the slowest for nearly a decade. Through its 2003 budget, which relies heavily on one-off measures such as tax amnesties to raise money, the government is hoping to cut the deficit to 1.5% of GDP from 2.3% last year.
Source: Yahoo News

Such cuts are very perplexing when the long term budgetary outlook in Italy looks so preoccupying. The parlous state of Italian finances has been highlighted several times by the European Commission, who also continuously complain about the poor quality of the information received from the Italian government. Italy has, in fact, one of the highest debt/GDP ratios outside Japan (over 100%) and one of the most complicated demographic panoramas in the developed world. For the last two years they have only avoided exceeding the 3% stability pact limit through the use of one-off measures (including the securitisation of public buildings). In a recent study of economic vulnerability to ageing Italy came in eleventh out of the twelve countries studied (the last place being awarded to Spain, which was described as 'Italy without the reforms'). With large reductions in benefits now built in, and little accumulated private wealth available as a fall-back position for large parts of the population, an important section of Italian society surely faces mid-term impoverishment. The absence of extensive public care for the aged, and the strength of family ties, mean that most of the burden will fall on the long-suffering Italian houswife, thus making an increase in female participation rates virtually a non-starter. This is going to be the symmetrical equivalent of getting young mothers out to work when there were no creche or child care facilities available. And in the midst of all this it's hard to see Italy boosting the Total Factor Productivity element by motivating a dynamic intellectual-capital growth push based on the few young people Italian society will have at its disposal. With the problem in such an advanced state maybe there is now not a lot that can be done, but living in the clouds is surely not one of the more recomendable therapies.

By 2040, Italy will have one elder for every working-age adult—putting it in a dead heat with Japan and Spain for the developed world’s worst demographics. On top of that, Italy’s pension spending as a share GDP is the highest in the Index countries, and the Italian elderly are among the least likely to be employed or to receive a private pension. Moreover, Italy’s overall eleventh-place ranking in the Index comes despite a series of pension reforms enacted in the 1990s (the “Amato” and “Dini” reforms) that are scheduled to make steep cuts in future benefits. Without these reforms, Italy would surely be in last place. The open question is whether Italy is likely to make good on its reform promises. Its second place ranking in the benefitdependence category (with family ties second only to Japan) gives some hope. Yet Italy comes in last in the elder-affluence category, a reflection of how seriously these future benefit cuts threaten elder living standards.
Source: Global Ageing Initiative Vulnerability Index

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