Italy to Seek EU Flexibility for Renzi's Tax Cuts, Adviser Says

  • Economic growth shows country ``has really changed gear''
  • Planned corporate tax cuts may come as early as next year

Italian Prime Minister Matteo Renzi will finance 35 billion euros ($39 billion) of tax cuts through lower government spending and an appeal to Brussels for more flexibility on budget targets, according to his economic adviser.

“We plan to finance this tax reduction through spending cuts on the one hand, and a little more margin relative to European parameters we currently have," Renzi adviser Yoram Gutgeld said in an interview in Rome. The deficit-to-gross domestic product ratio will stay at a projected 2.6 percent this year, and "we will ask for a higher number" than the 1.8 percent projected for next year.

Renzi’s hand is strengthened by a recovering economy. Data from Italian statistics agency Istat showed the country grew in the first half more than previously estimated and unemployment unexpectedly fell in July. Gutgeld attributes most of the increase to government reforms which include a so-called Jobs Act that makes hiring and firing easier. The improved prospects will likely impact Renzi’s draft budget plan which is due to be unveiled by September 20.

Beating Projections

“For the first time in many years, we are going to not only meet our growth projections but we will also probably beat them,” Gutgeld said. Europe’s fourth-largest economy “has really changed gear” as its emergence from a record-long recession picks up speed, he said.

Economic growth of 0.9 percent this year is “within the realm of possibility," Gutgeld said. That’s higher than the government’s last projection of 0.7 percent. Next year, GDP growth will likely also be higher than the last projection of 1.4 percent, he said.

Same Speed

“Over the last five years, 2010-2014, every year the growth or rather the shrinkage numbers were two to three points less than Germany," Gutgeld said. “In the first quarters of this year we are at the same speed as Germany, and external factors are identical for us and for Germany -- like the lower euro and petrol prices."

Italian GDP rose 0.4 percent in the first quarter and 0.3 percent in the second, up from a previous estimate of 0.3 and 0.2 percent respectively, Istat said. Unemployment fell to 12 percent in July from a revised 12.5 percent in June.

EU Flexibility

Renzi aims to further boost growth with about 35 billion euros of tax cuts from 2016 to 2018 when new elections will be due, including the elimination of a much-hated levy on first homes. Cuts in corporate tax, planned for 2017, may happen as early as next year, Gutgeld said. The government is studying a limited extension of a measure to lower social contributions for new hires “maybe just for the south or just for new activities."

Italy wants flexibility from Brussels on both investment and reform, he said. The government will argue that the tax cuts will prompt higher growth, and promise that it will “maintain the downward path on the deficit, and start the downward path on debt."

Gutgeld is in charge of a spending review which he says is “on target" to achieve 10 billion euros of budget savings in 2016, with measures including a reduction in automatic increases in health spending, and a cut in the number of buying centers for the public sector “from some 30,000 to just 30."

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