Renzi Announces Tax Cuts as Parliament Approves New Voting Law

Italy’s new prime minister promises to reduce business and income taxes but is short on the details of spending cuts.

Italian prime minister Matteo Renzi arrives in Brussels to attend a meeting of the European Council, March 6
Italian prime minister Matteo Renzi arrives in Brussels to attend a meeting of the European Council, March 6 (The Council of the European Union)

Italian prime minister Matteo Renzo said on Wednesday his government will cut business and income taxes by €10 billion while promising labor reforms to reduce the nation’s record 12.9 percent unemployment rate.

The tax relief, which Renzi said will put an extra €80 per month in the pay packets of workers earning up to €1,500, should be funded by extra budget cuts — including a reduction in the number of F-35 fighter jets Italy intends to buy from Lockheed Martin — and more borrowing. Italy can do so more affordably since interest rates on its bonds have fallen.

Renzi, who took office last month after forcing out his predecessor, Enrico Letta, appeared to renege on an earlier pledge to finance tax cuts entirely with spending reductions. He said the budget deficit goal would be raised from 2.5 percent this year while still respecting the European Union’s treaty ceiling of 3 percent of economic output.

The former Florence mayor also said his proposals to overhaul Italy’s labor market may include enhanced protection of newly hired workers and an extension of unemployment benefits.

Italian workers are notoriously difficult to fire, making firms reluctant to hire young workers. Among Italians under the age of 25, unemployment now stands at 42.4 percent, the national statistics agency said in late February.

Renzi’s own social democrats watered down labor reforms that were proposed by one of his predecessors, Mario Monti, in 2012.

Monti proposed to open up protected professions and liberalize the labor market altogether but opposition from trade unions and the left forced his government to shelve plans to add thousands more pharmacies and streamline the dismissing of staff. Efforts to lift professional restrictions on attorneys were halfhearted. Minimum tariffs were abolished but in order to compensate lawyers, a maximum was set on the number that can be employed in the industry, making it even harder for law graduates to start a business.

Average hourly labor costs in Italy are close to the eurozone average but have continued to rise throughout the country’s worst recession since the end of World War II — unlike was the case in Greece, Ireland and Portugal, countries that needed European financial support to stave off bankruptcy. Italian workers also tend to be less productive than their counterparts north of the Alps.

In a show of support for Renzi, the lower house of parliament did vote to enact electoral reforms on Wednesday that are designed to prevent a repeat of last year’s election when neither the left nor the right was able to secure majorities in both chambers of parliament.

The reforms, which Renzi negotiated with the conservative party leader Silvio Berlusconi and have yet to be approved in the Senate, would introduce electoral thresholds and guarantee the winning party or bloc a majority of the seats in the lower chamber. A separate law would reduce the upper chamber, which currently has equal lawmaking powers, to a regional assembly.