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News Analysis: Renzi's tax cut plan may boost approval levels, economic growth in Italy

English.news.cn   2014-03-15 05:50:40

by Eric J. Lyman

ROME, March 14 (Xinhua) -- New Italian Prime Minister Matteo Renzi this week announced plans to slash taxes by at least 12.4 billion euros (17.2 billion U.S. dollars) in a first major policy move aimed at sparking growth and making it less expensive for companies to take on new workers and reinvest profits.

But pollsters say the main beneficiary may be Renzi's level of public support.

The 39-year-old leader called the plan to cut payroll taxes by 10 billion euros was "historic" because it will be paid for by spending cuts and saving on bond payments. The move follows on the heels of plans to reduce a regional business tax by a total of 2.4 billion euros.

The larger tax cuts reduces employer contributions to a workers salary, making it less costly for companies to pay workers and increasing the average worker's paycheck by an average of 80 to 115 euros per month, money that will be used to buy goods and at least partially offset some of the 25 percent reduction in average household spending on durable goods since 2009.

The smaller reduction, of the regional business tax, best known as IRAP, will free up money for businesses to reinvest for expansion or for paying off debt.

Renzi also said that by July, the government will pay off another 68 billion euros of its own debt to Italy-based companies owed for goods or services -- further adding to the money supply.

Renzi's reform agenda is ambitious: it also includes passing new electoral reforms, trimming the country's bloated public administration, reforming labor laws, eliminating duplicate government services, and reducing the size and cost of parliament.

But his first move was a tax reduction.

"It is no surprise he started with this," said Maria Rossi, co-director of the polling firm Opinioni. "Some of these reforms will be unpopular, so it makes sense to start with a popular one."

Economists said the plans will have an impact, specially if it adds to the discretionary income of 10 million mostly low income Italians, as Renzi promises. But if his approval levels also benefit, as Rossi predicts, it will make it easier to push through other reforms.

"Renzi's approval ratings are already around 50 percent, far higher than any other political figure (in Italy), and once the extra money starts showing up in workers' pay checks it'll go higher," Rossi said. "That will earn him the benefit of the doubt with less popular changes."

One of the reasons Renzi can afford the cuts is because of the falling yield on Italian bonds.

Yield on Italy's 10-year bond, on secondary markets, at 3.41 percent, their lowest levels in years. Yields have fallen steadily since Renzi took the oath of office on Feb. 22, in part because the new government's reform plans have helped assuage investor fears Italy could be forced to default on its debt. Those fears pushed yields well above the unsustainable 7-percent threshold little more than two years ago.

"It shows how the positive leads to the positive," said Rome University economist Aldo Fiorentino. "A positive impression leads to lower bond yields, which allows a tax cut, which leads to an even more positive impression."

Editor: Mu Xuequan
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