Renzi Welcomes Budget Fight with Commission

The Italian prime minister challenges Brussels to reject his spending plan although labor reforms have stalled.

Italian prime minister Matteo Renzi welcomes his Luxembourgish counterpart, Xavier Bettel, in Rome, September 17
Italian prime minister Matteo Renzi welcomes his Luxembourgish counterpart, Xavier Bettel, in Rome, September 17 (Palazzo Chigi)

Italian prime minister Matteo Renzi challenged the European Commission on Friday to reject his budget proposal for next year that includes popular tax cuts but would do little to liberalize the bloc’s third-largest economy.

Renzi told Radio 24 that if the European executive rejects his spending plan, “We will submit it again unchanged.”

The commission “cannot be telling us which tax is the right one to cut,” he maintained.

Tax changes

Officials in Brussels are skeptical of Renzi’s plan to axe taxes on primary homes — an unpopular levy — instead of reducing the tax burden on companies and workers.

The leftist prime minister has pushed corporate tax reduction back to 2017 and income tax reduction to 2018, when parliamentary elections are due.

Italy’s top business tax rate is 27.5 percent against a European Union average of 22.6 percent. Its top income tax rate is low by European standards at 43 percent.

Taxes altogether equal 44 percent of economic output while government spending is nearly 50 percent.

Fiscal rules

Italy’s return to growth this year should allow Renzi to keep his deficit under the bloc’s treaty ceiling of 3 percent. The government projects the shortfall to be 2.6 percent this year and 2.2 percent in 2016.

But Italy’s debt, at more than 130 percent of gross domestic product, remains worryingly high while Renzi’s latest budget cuts spending reductions in half.

Labor reforms

The European Commission has long urged Italy to focus on reforming its rigid labor laws, improving the enforcement of contracts and speeding up its court procedures.

It kept silent earlier this year when Italy delayed bringing its deficit into structural balance until 2017 — when it could have fined the country — seeing that Renzi was pushing legislation to liberalize the labor market.

The prime minister proposed making it easier for firms to dismiss workers, hoping that would encourage hiring. But his left-wing party is critical while the conservative opposition, which otherwise supports labor reform, is still outraged that he pulled out of a pact with their leader, former prime minister Silvio Berlusconi, when parliament needed to elect a new president. It could block the reforms out of spite.

Liberalization is long overdue. Unemployment hasn’t been below 10 percent in three years. Nearly one in two Italians under the age of 25 is out of work. Older Italians tend to have secure contracts that are almost impossible to break while many younger workers can only get temporary jobs that offer no employment rights and protection.

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