Macroeconomic policy. The Letta Cabinet in its

first 2 months

July 2013

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.

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.

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

Structural reforms missing

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repealed by Letta)   For the first time in Italy, an insurance scheme for involuntary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.

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

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.

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

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