Italy is in a crisis of credibility

Unfortunately prime minister Mario Monti appears not to have read the insightful comment by Philip Booth, who suggested that ‘a radical programme of economic reform in Italy and elsewhere could save the euro...’ Professor Monti’s debut as prime minister was, on the contrary, marked by a new budget plan that, while implementing a sharp rise in the retirement age, was mainly about raising tax revenues. The New York Times got it right when it explained that ‘Italy’s leader offers tax increases, but no deep reform.’

The Monti package — that has already been blessed by a vote of confidence by the Italian Lower House — is worth some 30 billion euros, of which a good 2/3 is made up of increased taxation. The Italian Central Bank calculated that Italy’s fiscal burden will be approaching 45% of GDP in 2012. Independent economists suggest that fiscal burden is going to reach 56% of GDP, if you take into account only the ‘clean’ GDP net of the ‘shadow economy’ (which in Italy is typically included in the projections).

Part of the increased tax burden results from structural changes in the tax code: for example, a property tax on first homes, abolished by Mr Berlusconi to comply with a hasty electoral promise, has been reinstated. Part of the increased tax burden consists of measures well known to countries in fiscal shambles: such as increased taxation on gasoline. Raising indirect taxes on fuel seems to be a very popular sport among Italian politicians. Tax accounts for more than 2/3 of the gasoline retail price, but both Mr Berlusconi and Mr Monti made easy recourse to this device to grab revenue quickly. Italians are paying around 10 eurocents more per litre for their fuel than in the past: a particularly regressive measure that reflects the sense of ‘Greek tragedy’ under which the Monti government put together its first act.

The claim that the government has been acting ‘equitably’ is based upon the idea that being equitable basically means soaking the rich. So, new taxes are being levied against the mooring of ‘large’ boats (longer than 10 metres), ownership of private airplanes and helicopters, plus an additional surtax on motor vehicles with large engines. Stamp duties on bank accounts have been extended to the deposit of securities, and to other financial instruments and products, such as life insurance policies. Indirect taxation has also been raised on pipe tobacco, and God knows what Professor Monti and his team expect out of that.

However, the two most damaging schemes, in the long run, will be two apparently different ones that consolidate the impression (already overwhelmingly shared by international observers) that you cannot trust the Italian government. Professor Monti has imposed an additional one-off levy of 1.5% on capital repatriated under the tax shield enacted in 2009. The government then promised to capital holders both anonymity and a 5% tax on their repatriated capital. In less than two years, the ItalianRepublicis thus reneging on a fiscal covenant openly agreed with some of its citizens. Of course, the beneficiaries of this measure will be stigmatised as ‘tax evaders’, or horrible ‘capital exporters’ to provide a veneer of respectability to this overt breach of trust.

Similarly, the government revised the index linking of pensions to inflation: pensions of up to twice the statutory minimum will be adjusted in full but those in excess of that figure will be frozen. It would have been more honest to call it a special tax on retirees. However, what matters most is that, once again, the Italian government proved it did not care about keeping its own promises.

Italy is therefore in a crisis of credibility. Mr Monti brought his personal credibility with European Institutions to government. That’s his gimmick. But how much good will it do Italyto be credible with Merkel or Sarkozy, but untrustworthy with its own citizens?

The government package does not include structural reforms to help the working of markets and, therefore, a return to economic growth. Some minor measures (on taxi permits and pharmaceutical distribution) were scrapped in the parliamentary debate due to interest group pressure. There are no ‘bazookas’ for economic growth, but it is clear that Italy needs its regulations to be dramatically simplified, and barriers to entry in a variety of business sectors to be repealed all together, if it wants to at least contemplate the possibility of going back to prosperity.

Before joining the government, Professor Monti long stressed the need for pro-growth measure. But his initiatives so far have lacked any consistent commitment to de-regulation, and have aggravated taxation therefore shrinking Italian’s disposable income, as well as consolidating the opinion the Italian government cannot be trusted.

The government has already announced the ‘second act’ of its reforms for January, and allegedly it will focus precisely on economic growth. It needs to be a totally different strategy to the one we have seen so far.

 

This reminds me of a Dennis Healey budget.

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