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The report card of the Bank of Italy on the maneuver of the Meloni government: what it rejects and what it promotes

The report card of the Bank of Italy on the maneuver of the Meloni government: what it rejects and what it promotes

Bank of Italy evaluates the budget law. Tax justice, pensions and the single check are doing well. Attention to basic income and the VAT cut. The cash ceiling and the incremental flat tax are rejected. What emerged from the parliamentary hearing of Fabrizio Balassone, Head of the Economic Structure Service of the Economics and Statistics Department of the Bank of Italy

"Prudence" is the keyword to interpret the hearing of Fabrizio Balassone , Head of the Economic Structure Service of the Bank of Italy's Economics and Statistics Department, in the Chamber on the Meloni government's budget law . The financial institution has reviewed the measures envisaged by the finance law and has expressed its appreciation where it found " prudence ", vice versa it raised remarks for those measures which, instead, have a less weighted approach.

THE MEASURES THAT CONTRAST THE INCREASE IN ENERGY COSTS

The budget law increases public debt by around 1.1 percent of GDP in 2023 and by 0.1% in 2024, a reduction of around 0.2 percent is expected for 2025. The expansionary measures are aimed at mitigating the impact of the rise in energy costs on households and businesses, but only for the first three months of 2023. The increase in the deficit is provisional in nature, Palazzo Koch likes this approach given " the high uncertainty that characterizes the macroeconomic scenario and the limited budget space available , this approach appears prudent”.

BANK OF ITALY: PRUDENCE-BASED INTERVENTIONS ON PENSIONS

Overall, the evaluation of the pension measures is positive. The maneuver modifies the “ retirement access requirements and makes the indexation to the cost of living of higher-value benefits less generous ”. These measures should reduce "net debt by 1.3 billion next year and by around 2.7 billion on average per year in the following two years". Palazzo Koch evaluates these interventions " based on criteria of prudence , dictated by the fact that the ratio between pension expenditure and GDP is still far from its maximum point and that higher activity rates even among the more mature workers are necessary to counteract the negative effects of population aging on labor supply”.

POLICIES FOR THE FAMILY: SINGLE CHECK GOOD, MINUS THE CUT OF VAT

The financial maneuver for next year strengthens the single allowance (the measure introduced last year which rationalizes the pre-existing family support measures) by increasing the amount by 50%, making the increased amounts structural for disabled children over 18 years. In addition to this, the Government has ordered the "increase, limited to one month, from 30 to 80 per cent of the allowance for parental leave for female employees who will end the period of compulsory leave after 2022" and the " reduction to 5 per cent of the VAT rate for some baby products”. The Bank of Italy criticizes this last aspect because unlike the single check "which follows a logic of selective universalism", the reduction in VAT on products for children benefits all consumers , even those families who do not pay in a "condition of need".

CITIZENSHIP INCOME: BEWARE OF THE MOST ADORABLE AREAS

Many more doubts are expressed in the matter of Citizenship Income. “The introduction of the citizen's income represented a significant step in the modernization of our welfare system – underlines the Bank of Italy -. In recent years, the subsidy has first contributed to containing the negative effects of the Covid-19 epidemic on the disposable income of the most fragile families and then to supporting their purchasing power, particularly affected by the recent inflationary shock". However, Fabrizio Balassone does not hide the critical issues encountered by the measure linked "to the dual nature of the instrument , which is at the same time a welfare measure and an active policy for the accompaniment and reintegration of the beneficiaries into the world of work". Palazzo Koch underlines that the reform announced by the Meloni government "could be an opportunity to resolve this ambiguity and strengthen the effectiveness of the measures in reaching situations of need". However, he invites the executive to " pay attention to the risks of increasing poverty in areas where basic income is more widespread and the labor market is structurally malfunctioning". The reduction in the monthly benefits envisaged by the Meloni Government reform for 2023 "could also concern families who are difficult to find an alternative source of income on the labor market, moreover in a context of economic slowdown and with a significantly increasing cost of living.

BANK OF ITALY: NO SPECIAL TAX REGIMES, BETTER AN ORGANIC REFORM

Less soft is the assessment on the extension of the flat-rate regime and the introduction of the so-called incremental flat tax. The maneuver raises the turnover threshold that limits the application of the flat-rate scheme for freelancers to 85,000 euros . The Bank of Italy is concerned that similar situations are treated differently: "the existence of excessively differentiated tax regimes between different types of workers also poses a significant issue of horizontal equity, with the risk of treating individuals with the same ability to pay". The creation of " special regimes " can lead to " incentivising tax evasion to avoid the tax burden incurring when exceeding the same". So the conclusion is that it would be better to aim for an "organic reform of the overall tax system, with the aim of simplifying it and increasing its fairness".

TAX JUSTICE MEASURES WELL

Overall positive is the assessment of the measures envisaged by the budget law on assessment , litigation and collection which include the interventions on the reduction of sanctions, the payment in installments or the removal of lesser tax claims. “The bill includes some extraordinary measures aimed at reducing the tax litigation backlog in the Tax Courts and the Court of Cassation. These provisions, some of which have already been adopted in the past, can facilitate the launch of the recent tax justice reform ”, says Fabrizio Balassone. A further set of interventions aims to dispose of uncollectable tax credits, this "would make it possible to free up human and material resources and increase the efficiency of collection".

BANK OF ITALY: WE ARE NOT HERE ON THE CASH ROOF AND ELECTRONIC PAYMENTS

On the other hand, the assessment of interventions in the field of payments is heavily negative. The budget law raises the ceiling for cash to 5,000 euros and introduces a limit of 60 euros , below which merchants who do not accept electronic payments are not liable to sanctions. “As already mentioned in the past, the limits on the use of cash, while not providing an absolute impediment to the perpetration of illicit conduct , represent an obstacle for various forms of crime and evasion – said Fabrizio Balassone -. In particular, studies have emerged in recent years – also conducted in our Institute on Italian data – which suggest that higher thresholds favor the shadow economy ; there is also evidence that the use of electronic payments, allowing the tracking of transactions, would reduce tax evasion ”. Furthermore, the provisions on cash payments and the introduction of some institutes that reduce the tax burden for non-compliant taxpayers "risk of coming into conflict with the push towards modernization of the country that animates the PNRR and with the need to continue to reduce tax evasion”, underlined Fabrizio Balassone.

THE UNCERTAIN SCENARIO AND THE COVERAGE OF ENERGY MEASURES

Balassone commented on the topic: “In line with the limited room for manoeuvre, the budget bill envisages an increase in the deficit compared to its tendential value almost exclusively for interventions to support households and businesses connected with the energy emergency. However, these measures only concern the first quarter of 2023: should the effects of the energy shock continue also in the following quarters, any new measures should remain temporary in nature and be primarily financed by resorting to cost savings or higher revenues. A further effort could be made to make them even more targeted and selective”.

THE CONCLUSIONS OF THE BANK OF ITALY ON THE MANEUVER

However, overall, the opinion of the Bank of Italy on the maneuver does not appear to be negative. Here is the conclusion: "In the current difficult context, budgetary policy has to reconcile two needs: to support households and businesses in the face of the energy shock and to consolidate the confidence of savers and investors, thus creating the conditions for economic growth . Continuing on the path of reducing the weight of the public debt is necessary to bring the country's financial conditions in line with those of the main countries of the euro area. Also due to the already very high level of public debt in relation to GDP, the scope for an expansionary policy is very limited. On the other hand, a significant boost to economic growth will come from carrying out the interventions envisaged by the PNRR, partly without immediate costs for the budget (for transfers), partly with costs lower than market ones (for loans)”.


This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/la-pagella-di-banca-ditalia-alla-manovra-del-governo-meloni-cosa-boccia-e-cosa-promuove/ on Tue, 06 Dec 2022 07:01:24 +0000.