MNI: Italy Faces Struggle To Maintain Tax Cuts - Sources

MNI (ROME) - Italy is likely to face significant challenges to maintain recent income tax reductions for those earning less than EUR28,000 per year and for those in the EUR28,000-50,000 per year bracket, as well as an early retirement programme, sources close to the matter told MNI, though they added that the government still wants to look at further tax cuts.

Keeping these measures in place from 2024 onwards is expected to cost around EUR18 billion, which would increase Italy's fiscal deficit to an estimated 4.3% of gross domestic product this year. On the positive side, revenues are likely to be about EUR13 billion higher than expected, which could provide more leeway for next year, according to the sources.

Despite this, the Italian government is expected to debate additional measures, such as extending the 15% flat tax for self-employed individuals beyond the current EUR100,000 per year threshold, or further simplifying the existing three income tax brackets to move closer to a single tax rate.

The government is set to meet on Aug 30 for a preliminary budget discussion, and Rome is required to submit a draft budget to Brussels by Sept 20 under new EU fiscal rules. (See MNI POLICY: EU States To Choose Easier, 7-Year Fiscal Plans)

“We won’t be able to accommodate everyone’s plans, and some promises will have to be left out,” one finance ministry source told MNI, adding that this will be the most difficult budget faced by the government of Prime Minister Giorgia Meloni.

Italy is committed to reducing its deficit to 3.7% of GDP by 2025 and has ruled out tax increases to achieve this target. Budget cuts will focus on reducing the proportion of certain expenditures within the overall budget, sources said.

PENSION FIX

A new one-year fix allowing for workers to retire early will need to be found after several years of temporary measures, to avoid reverting to the reform approved during the tenure of former Prime Minister Mario Monti, which set the retirement age at 67.

While Italy recognises the need to extend the working lives of its population, the government is seeking incentive-based approaches rather than mandatory measures, sources noted. Among solutions being discussed for the 2025 budget is allowing early retirement for individuals who have worked for 41 years, including years worked as minors.

The cost of this measure compared to last year's remains unclear, as more people in Italy are approaching retirement age each year. The government will need to clarify these figures before submitting the budget to Brussels, the source added.

GROWTH TARGET ON TRACK

Despite weak economic momentum in Europe, Italy is on course to meet its 1% growth target for 2024, which would provide the government with the anticipated budget margin for 2025. Funds made available by the European Union’s NextGenerationEU programme are also contributing to growth this year and are expected to have an even greater impact in 2025, when growth is projected to reach 1.2%.

Rome is also hopeful that the European Central Bank will ease its financing costs by cutting interest rates again in September and possibly in subsequent meetings, sources said.