Renzi Tries to Counter Funding Doubts as He Seeks Tax Cuts

Italian Prime Minister Matteo Renzi’s government is scheduled to pass measures today to revive the nation’s economy, including payroll-tax cuts starting next month.

Renzi and his ministers are due to meet in Rome a day after Parliament approved a multiyear budget plan that forecasts a 0.8 percent economic expansion this year. Italy’s longest contraction since World War II ended in the fourth quarter. Renzi’s cabinet will gather at 3:30 p.m. Rome time, with a press conference expected to start at 4:30 p.m.

Renzi is counting on 6 billion euros ($8.3 billion) in spending cuts to help finance the centerpiece of his stimulus plan: a lighter tax burden for lower-income workers that will be in force before the May 25 elections for the European Parliament, when he faces the first test of his popularity.

Those savings may not be sufficient, forcing the government to rely on one-time items this year and on additional budget adjustments in 2015, representatives from the national statistics institute, the Bank of Italy and the country’s auditing court told lawmakers this week.

“While we still wait to know what these spending cuts will be exactly made of, one wonders if the 6 billion include the 3 billion already planned under the government” led by Renzi’s predecessor, Enrico Letta, said Tito Boeri, an economics professor at Bocconi University in Milan. “The question is key to understanding the feasibility of those cuts.”

Renzi Backing

Backing for Renzi’s Democratic Party appears to have surged since he became premier in February after engineering Letta’s ouster. It was at 32 percent in an April 15 poll by Datamedia Ricerche institute. That’s up from 25.4 percent in the 2013 national elections.

Acting amid budget constraints due to a public debt of over 130 percent of gross domestic product and set to rise more this year, Renzi committed to keep the deficit below the European Union limit of 3 percent of GDP in 2014. At the same time, he had to postpone by one year to 2016 the goal of a structural balanced budget, or net of the effect of the economic cycle.

The government may decide today to reduce some tax breaks for high-income earners such as the rebates on prescription drugs and mortgages, Il Sole 24 ore reported yesterday, without citing anyone. Other cuts may affect the defense spending, Sole said.

Extra Revenue

Among the one-off measures that will help Renzi fund the payroll tax cut this year is extra revenue from the value-added tax on the arrears the government committed to pay companies in the coming months.

Earlier this month, the premier said that more funding will come from an increase to 26 percent of the levy on the stakes owned by the country’s lenders in the Bank of Italy that have been re-valued to a total 7.5 billion euros with a law passed last year by Letta’s government.

That tax was criticized by the banking association ABI, which said that such an increase may cut the ability to lend of as much as 1 billion euros.

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