Italy gives thumbs up to 2014 budget with tax, spending cuts

Enrico Letta in Parlamento 2.jpg

The Italian government on Tuesday (15 October) approved a 2014 budget containing tax and spending cuts aimed at stimulating the recession-bound economy while keeping the budget deficit inside the European Union's 3% of output ceiling.

"I don't want to make dramatic claims but this is a significant step in the right direction, with lower taxes for companies and workers," Prime Minister Enrico Letta told reporters during a break in the cabinet meeting.

His left-right coalition government approved the main structure of the package just a few hours before the end of the Oct. 15 deadline imposed by EU law, but the cabinet meeting resumed to continue ironing out details.

The budget contains a reduction in the so-called tax wedge – the difference between labour costs and take-home pay – worth €10.6 billion in 2014-2016, Letta said in a broad presentation of the main numbers in the three-year financial plan.

The tax reduction will be split between €5bn for workers and €5.6bn for companies.

For 2014, the cut amounts to a total of 2.5bn, much less than was called for by both employers and trade unions, highlighting the difficulties for the government in identifying offsetting spending cuts.

Even before the budget was presented, employers' lobby Confindustria, which wanted a cut in the tax wedge of at least 10bn, said the plan appeared too timid "to meet the aim of giving force to the slow recovery that is emerging."

The euro zone's third largest economy has been in recession since the middle of 2011 and, after years of recession and stagnation, is smaller now than it was in 2001.

The government forecasts growth of 1%  in 2014, but most analysts expect expansion to be closer to 0.5%.

The budget, which aims to reduce Italy's fiscal gap in 2014 to 2.5% of output from a targeted 3% this year, must now begin its passage through parliament.

The details of how to distribute the tax cuts to workers would "be up to parliament and the social partners", Letta said.

The tax cuts will be partly funded by €2.5bn of cuts to the central government in 2014-2016 and a cut of €1bn to funding for the regions.

The budget contains no cuts to health spending, contrary to media reports in recent days, following fierce protests from Health Minister Beatrice Lorenzin, and Letta said there would be no other cuts to the welfare budget in general.

Banks and insurers are called on to fund a significant part of the tax cuts envisaged over the next three years, through a change in the tax regime covering financial losses which will cost them a total of 2.2bn.

A further €500m will come from the sale of government buildings.

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