Italy Can Cut Taxes Within EU Deficit Estimate, Baretta Says

Italy doesn’t need to bring its deficit above the European Union’s estimate this year in order to fund the tax cuts outlined by Prime Minister Matteo Renzi, Finance Undersecretary Pier Paolo Baretta said.

The country’s budget gap will be 2.6 percent of gross domestic product in 2014, the European Commission estimated in its winter economic forecasts last month. Renzi has said Italy could surpass that threshold if needed, without breaching the EU’s 3 percent limit.

For this year, “we could even avoid” using the deficit margin, Baretta said late yesterday in an interview in his office in Rome. “It can be considered, in the perspective of liaising with Europe, to fund further arrears payments. Still, the further we stay from 3 percent, the better.”

Finance Minister Pier Carlo Padoan said March 10 the government’s estimate is close to the commission’s forecast of a 0.6 percent rise in gross domestic product this year. That compares with a 1.1 percent GDP growth estimate by Padoan’s predecessor, Fabrizio Saccomanni.

The 2.6 percent deficit target can be maintained even amid lower growth, Baretta said. “The denominator doesn’t affect this target, if anything it’s the target that we imposed ourselves that affects our choices.”

Baretta declined to elaborate on growth forecasts, and said the government will present its official projection in the next few days.

Seeking Recovery

Renzi’s government has pledged tax cuts for companies and households as well as investments in schools and an overhaul of labor regulations to revamp growth in a country that suffered from a nine-quarter long recession through the three months ended in September.

While an increase in the capital-gains tax rate will pay for a 10 percent reduction in a regional levy on companies, Renzi needs to fund a planned cut to the personal income tax for 10 million low earners worth about 7 billion euros ($9.7 billion) this year.

Renzi has said the government can save the equivalent through spending cuts, while Special Commissioner for Spending Review Carlo Cottarelli has said 3 billion euros is a prudent estimate. “It’s possible to imagine an intermediate” figure between the two, Baretta said.

Arrears Plan

About 2.5 billion euros should come from lower debt-financing costs, while more value added-tax revenue, tied to the state’s plan to repay arrears to companies, will contribute for as much as 1.5 billion euros, the undersecretary said. The additional yield investors demand to hold Italian 10-year bonds over similar-maturity German bunds narrowed to 173 basis points on March 11, the least since June 2011.

“These three items allow us to be covered without resorting to the deficit margin many people are talking about,” Baretta said.

Italy also has pledged to repay a total of about 68 billion euros of arrears to public administration suppliers by the end of September. Of that, about 25 billion euros set aside by previous governments will be paid by June, Baretta said.

About 80 percent of total arrears are considered current expenditure and have already been accounted for, he said.

If executed in a ``timely manner and in full’’ the plan “has the potential to make the Italian economy grow more strongly for some time,” Daniele Antonucci, senior European economist for Morgan Stanley & Co. in London, wrote in a research report this week.

Additional revenue in the future could come from the repatriation of funds Italians illegally stashed abroad and from a tax agreement with Switzerland, which authorities in Rome and Bern have been discussing for years.

“We’re going ahead with talks, but haven’t reached a conclusion yet,” Baretta said. He also said the government will present a new draft law in the next few days on a voluntary disclosure program for Italians’ funds abroad.