BRUSSELS: Matteo Renzi has challenged the EU to approve a budget that favours tax relief over cuts in spending, as Italy’s prime minister attempts to support the country’s nascent economic recovery with looser fiscal policy.
The move by Mr Renzi to focus his economic programme on tax cuts, worth as much as €35bn over three years, could raise eyebrows in Brussels, especially since it is accompanied by a less ambitious spending cut target than expected.
Italy’s high debt load — more than 130 per cent of gross domestic product — makes its budget one of the most scrutinised in the EU. Any watering down of fiscal discipline could leave Italy vulnerable to a future debt crisis.
Some EU officials have already expressed doubts about Mr Renzi’s plans to axe a tax on primary homes, preferring a reduction of the tax burden on employers and workers.
“The [budget proposal] decided by the Italian government does not go in that direction,” said Valdis Dombrovskis, vice-president of the European Commission in charge of the euro. “We will have to discuss it with the Italian authorities to understand its motives,” he added.
The recovery in the eurozone’s third-largest economy, which in 2015 returned to growth after years of recession, coupled with an aggressive structural reform agenda, has removed some of the pressure on Mr Renzi.
Italian officials point out that even with an aggressive tax cut plan, they will still remain well within the 3 per cent budget deficit to GDP ratio set by Brussels, and will begin lowering their debt ratio next year. They also stress that other countries — such as Spain and France — have been more willing to flout EU budget rules than Italy.
“Some of us believe that European rules need to be respected and some want to apply them with a bit more fantasy,” Mr Renzi said on Thursday. “Our choice is to respect the European rules even as we have done huge work to change them,” he added.
However, by scrapping plans to curb tax breaks, Mr Renzi also cut his target for spending reductions from €10bn to about €5bn.
Italy’s budget deficit target is likely to be set at 2.6 per cent this year and 2.2 per cent next year, though if the EU allows extra leeway for countries on the front lines of the migrant crisis, it could rise to 2.4 per cent.
