- There will be effective government push to implement it, and
- There will be a government to implement it.
Overall, the bill plans for budgetary savings of €20bn in 2012, and €25.5bn in 2013.
Majority of the reductions will be driven by higher taxes, which means:
- They will have a longer-lasting adverse impact on growth, and
- Cannot be seen as permanent or even long-term, as point (1) above implies that for an already heavily taxed economy (with General Government total revenue accounting for 45.5-46% of the country GDP in 2010-2011 against G7 average of 35.2-35.4%), Italy will have to come off higher tax path sometime in the near future.
Overall, based on IMF data, the estimated impact of the budgetary plan announced yesterday will take out roughly €1,980 per working person in new taxes and spending cuts, which amounts to 9.3% reduction in the per capita income, adjusted for price differentials. Accounting for this, IMF projections for Italy suggest that Italian real disposable incomes will not return to their pre-crisis peak anytime before 2016. And this is based on IMF's rather rosy assumptions for growth in 2011-2013, which were compiled prior to the onset of the recent economic slowdown.
Of course, in a typical Italian fashion, the new plan is virtually devoid of the structural spending cuts and reforms on the spending side. Overall spending cuts include:
- Central government ministries cuts of €6bn in 2012 and €2.5bn in 2013.
- Savings on the funds allocated to town councils, regions and provinces of €6bn in 2012 and €3.5bn euros in 2013.
- State pension system savings of €1bn in 2012 alongside the increase in retirement for women in the private sector by 5 years to 65. In addition, there will be restrictions on retirement funds for public sector workers who retire early.
- Burden sharing with senior politicos was achieved by restricting MP's reimbursements for flights only to the economy class costs.
- All public bodies with fewer than 70 employees will be abolished (excluding economics and finance functions).
- Provincial governments with less than 300,000 inhabitants and covering less than 3,000 square kilometres will be abolished. Town councils with less than 1,000 inhabitants will be merged. It is estimated this will mean the abolition of up to 29 of Italy's 110 provincial governments.
- There is a new "solidarity tax" on high earners, to be levied for three years from this year, as an additional 5% on income above €90,000 per year and 10% on income above €150,000
- Increase in taxation of income from financial investments from 12.5% to 20% - which is a regressive measure for Italy, where investment is running at 19.9% of GDP this year, down from the average of 21.6% of GDP in pre-crisis years
- Increases on a so-called "Robin Hood" tax on energy companies
- Increase in the base rate for corporation tax
- Higher tax on lotteries and betting and higher excise duties on tobacco – the latter being a personal blow to the devotees of the Italian MS (aka Morto Sicuro) cigarettes, like myself
- Further curbs in tax evasion – a set of policies that has been promised more often than the Italian Governments' went to elections, and yet to be delivered in any meaningful measure. Of course, the tax increases above are only going to add incentives to evade taxes in the future, and
- Finally, in a silly season way, all non-religious public holidays will be celebrated on Sundays, to reduce their disruptive effects on national output (note to Berlusconi - outlawing Italian siesta hours in services would do some marvels to output too).
The only structural reform promised by Berlusconi emergency measures is, as of yet completely unspecified liberalisation of national labour contracts.
Good luck to all who would go long Italy on the back of these 'measures'. In my opinion, there is about 25% chance of the Italian Government actually delivering on revenue raising targets from this package and about 10% chance we will see noticeable reductions in the costs of the state sector in Italy, with one slight exception – the local and regional reforms. However, there is a good 75-90% chance that Italy will slide into a recession in Q3-Q4 2011 and its 2011-2016 average growth rate will likely slide from 1.31% projected by the IMF back in April 2011, to ca 1.02%. Which, of course, will mean that its debt will top 120% of GDP mark in 2012 and is
unlikely to alter the path set out for it in the IMF projections.
Here are few charts: