Italy’s Letta Fails to Stabilize Coalition with Tax Cut

By giving in to right’s demand for tax repeal, the prime minister invites scorn from his own allies.

After a months-long internal struggle that jeopardized the stability of Italy’s ruling coalition, Prime Minister Enrico Letta announced the lifting of two payments of a controversial housing tax last week. While a victory for the former premier, Silvio Berlusconi, who had conditioned his support for the government on repeal of the tax, the announcement did little to guarantee stability in the coalition for the long term.

Although the housing tax was implemented with Berlusconi’s party’s support during Mario Monti’s technocratic government, its abolition was the linchpin of his election campaign and one of the reasons he recovered so quickly in the polls ahead of February’s election, given that almost 80 percent of Italians own their own homes.

Along with a vote against Berlusconi’s ban from public office after he was convicted of tax fraud last month, his Il Popolo della Libertà demanded the housing tax’ repeal to continue what is an uneasy coalition. But Letta now possibly faces a worse situation. In order to compensate for the €4 billion the housing tax was supposed to raise and avoid breaking the European Union’s deficit rules, he will have to find alternative sources of income. It is not clear whether a consumption tax raise, postponed last July, can be avoided. A new service tax has already been announced.

While the outlines of the new tax are still vague, it will weigh on Italians relating to the use of public utilities and services provided by their municipalities. Letta’s cabinet is to design general guidelines of the service tax in October but criticism has already been raised about its very conception, especially considering the lower utilities consumption rate as a result of Italy’s slight recession. According to the Financial Times, the levy may actually slower Italian business’ recovery more than the housing tax did while not providing for that much more revenue.

Worse, the deal could further upset an already precarious political balance of power. The left’s “nonvictory” is resulting in a steady loss of confidence from its own voters. The parameters of the new service tax are to be identified by local governments but expected to be more horizontal than the housing levy was, thus hurting middle and lower income households — the very voters the Democrats claim to represent.

Moreover, indulging the conservatives’ demands was perceived as a sign of weakness on Letta’s part when the calls for more equity measures from his own party remain to be addressed.

The stability of the coalition government is far from secure. Senators are also to decide in October whether Berlusconi can keep his seat despite the tax fraud conviction. The anti-estabishment Five Star Movement could play a pivotal role. Fifteen dissident senators are reportedly ready to discuss backing a Democratic government. President Giorgio Napolitano’s recent appointment of four more senators for life could be interpreted in this regard as an attempt to solidify the left’s base in the upper chamber.

Notwithstanding these machinations, there is no sign of imminent political stability. For the third fall in a row, Italy may in fact see a political stalemate. New elections could hardly provide a solution as they would not significantly change the balance under current election laws. Instead, new budgets measures are introduced that will do little to improve the prospects for a swift economic recovery while putting more pressure on Italian businesses and families.