The expectation for the initiatives in the economic field that will be adopted by the Government in the meeting of the Council of Ministers on Wednesday 12 goes beyond the content of the incoming measures. In fact, this is the first examination to which the new Executive led by Matteo Renzi is called, which has fueled expectations, all too great, on the change of pace compared to the previous Governments as well as even on a new mode of action in the proposition and implementation of the reforms , which our country needs so badly.
On the merits, however, the main attention is paid to the announced "cut" of the tax wedge, which according to most national and even international observers constitutes, for the Italian situation, the fundamental junction of an economic policy that intends to relaunch consumption and the occupation.
On this subject, there are four, broadly speaking, the elements on which the Renzi government is awaiting the test. The first is the overall economic entity of the intervention; the second consists of the tools with which the "cut" will be made; the third are the sources of financing of the "cut", as they represent the other side of the economic policy action; the fourth are the regulatory modalities of the intervention and above all its implementation times.
1. Overall economic entity. It now seems established that the reduction of the tax wedge will lead to a decrease in tax and/or social security contributions, in the order of 10 billion euros per year, between those which workers will directly benefit from and those from which employers will be relieved. For now, it is the only aspect of the operation that has already been clarified.
All things considered, it is a modest intervention, since it is less than 5% of the size of the wedge. To give a real boost to the economy, more would be needed, probably at least that 10% cut that Renzi had led to believe in his first speech in the Chamber, playing a bit with words and numbers. Ten billion is even less than what the previous Letta government had begun to outline. However, with the state budget one cannot play around, given the constitutional constraints and deriving from the European agreements, and, realistically, finding 10 billion already seems a complicated undertaking. Better 10 billion really cut than 15 or 30 announced, but unfeasible.
2. Intervention tools. Given that the tax wedge is the difference between the total cost for the employer of an employee and his net salary, the reduction intervention can operate both on the charges borne by the companies and on those borne directly by the worker. The company bears, essentially, a part of the social security contributions (INPS and Inail) and the share of IRAP which weighs on the cost of labour. It should not be forgotten that in addition to the monthly sums paid to the employee, the employer must also operate on the provisions of the severance indemnities. The employee must pay his share of social security contributions as well as the tax on his income, even if materially withheld and paid by the employer.
The reduction of the tax wedge, therefore, can be obtained both by cutting the burdens of the companies and by reducing the burdens of the worker. It is evident how the two methods produce different effects, both useful for the growth of the economy, yet different. If businesses are favored, the aim will be to improve their degree of competitiveness and, therefore, to stimulate investments and hiring; if workers are benefited, consumption will increase. What is most needed in the current economic situation? Which of the two directions would give a more substantial boost to the economy? Opinions differ.
We could also operate in both directions at the same time, through a balanced mix of interventions. However, given the limited resources available, the choice seems to prevail to concentrate the action on one side only, in order not to water down its effectiveness, as explained by the Minister of Economy and Finance, Pier Carlo Padoan; without, however, saying more.
According to what has seemed to understand so far, between hyper-synthetic declarations and jokes from the premier, the economic intervention will be mainly on the side of the workers, to whom the Irpef levy will be reduced. For a worker with an income of around 25 euros a year, the benefit could be around 80 euros a month, it was said. The objective of economic policy would therefore be to stimulate consumption and, therefore, indirectly production and employment.
And for businesses? Probably nothing or very little in the way of reducing withdrawals. Some speak of 30% of the intervention in favor of companies, but pressure from the workers' unions seems destined to further shift the balance towards employees. To compensate for the production system, the head of government has announced a series of simplification measures for businesses, which should lighten the obligations and constraints and, therefore, indirectly, translate into advantages and lower costs. Will it be enough to promote an immediate increase in employment, which is the first declared objective of the Government?
3. Sources of funding. The lower revenues resulting from the reduction of the tax wedge must be fully compensated in the state budget. We cannot afford any imbalance in this sense, given the level of annual deficit already painfully contained within the 3%, maximum allowed by the European Union. The ten billion of revenue losses must be replaced by expenditure reductions or revenue increases of the same overall magnitude.
The main way forward should be the reduction of public expenditure. On this everyone agrees, without exception. The level of tax burden of our economy, ie the ratio between tax levies and gross domestic product, is at unsustainable levels, which constitute the most important ballast for the economy. Any new form of levy would fuel this relationship, while in the river of public spending it is easy to see important streams of inefficiency and waste.
Therefore, the aim is to recover resources with the so-called "spending review", and the first results of the work that the commissioner for the spending review, Carlo Cottarelli, is producing with great enthusiasm are awaited. But while placing the utmost reliance on Cottarelli's successes, it is foreseeable that there is, in addition to the problems of the extent of the savings, the question of the timing of the realization of the lower expenses. In fact, only immediate savings can allow immediate relief from the tax wedge. And the inertia of the spending mechanisms hardly allow instant benefits for the state coffers. Assuming, however, that a part of the financing can be effectively covered by the spending review, another will remain to be covered.
For so-called "structural" roofing, it will take time, other reforms will be needed. Therefore the Government needs "buffer" resources, ie temporarily replacing the structural ones that will come later, as Minister Padoan has made clear. But the hypothesis of using European funds for this purpose seems impracticable.
Among the possibilities outlined by the Government immediately after taking office, there would be that of an increase in the taxation of financial income, understood generically with capital income and other income. But it is a complex initiative, which will hardly be implemented immediately, even to finance this first reduction in the tax wedge.
The possible proceeds from the regularization of capital held abroad remain, through the so-called provision of voluntary disclosure, already in force and awaiting parliamentary examination. The imminent agreement with Switzerland, on the exchange of information, could give a boost to requests for regularization. As a "buffer" loan, it could be fine, but the revenue from this measure appears somewhat uncertain. At the moment, the Government has not officially quantified it, with the technical report accompanying the decree law 4/14, even if Padoan spoke of 4-5 billion of possible revenue. It will probably depend on the greater appeal that the Government will be able to give to the measure, which is currently very expensive for those who decide to use it given the impunity envisaged for crimes. In short, the bogeyman of the agreement with Switzerland may not be enough.
Finally, for financial coverage, Padoan could put on the table the savings that the reduction of the spread and the low interest rates for the remuneration of public debt securities are producing for the state budget.
In short, it is a matter of largely uncertain or temporary financial coverage, which casts uncertainty over the real extent of the measure to reduce the tax wedge that the Government is about to adopt. Moreover, the Government must consider that the choice of financial coverage is also an action of economic policy, since it is not indifferent to the trend of the economy from which source the resources that will be used to reduce the tax wedge come from. Replacing a levy with another levy, even if from a different source, for example, would not be as effective as cutting unproductive spending.
4. Methods and timing of implementation. The problem of financial coverage risks influencing the choice of methods and above all of the implementation times of the tax/contribution relief. If the 10 billion are not all immediately available, the Government will have to adopt a measure with delayed effects or, at least, spread over time. Not surprisingly, perhaps, the Prime Minister has stated that the next Council of Ministers will make a formal "commitment" to reduce the levy.
The measure could be passed in the form of a decree law (a mere bill would immediately nullify the credibility of this government), however it is not improbable that its effects will not all be immediate, but rather subordinated to the future procurement of the financial resources necessary to cover it. Moreover, if a large part or all of the cost for the Treasury will depend on the reduction in income tax for employees, it will be easy to postpone its application, for example, at the time of the year-end adjustment or the payment of tax advances .
But if this is the case, the effectiveness of the reduction of the tax wedge for the revival of consumption, employment and, in any case, the economy would become feeble and tardy.
