Italy’s League floats tax cut paid for by deficit
Italy’s ruling League party has set up another clash with the European Union over budget rules, saying it wants to cut taxes by raising its deficit.
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The statement of intent comes with Italy in political crisis after the League said its coalition government with the anti-establishment Five Star Movement was no longer workable.
Yesterday, the Five Star said Matteo Salvini, the leader of the League, is “no longer a credible interlocutor”. The government is deadlocked, with no consensus on how to move forwards.
League economics chief Claudio Borghi said today to state-owned TV channel RAI: “We need to pursue a tax cut and it is obvious that a small proportion will be funded with the deficit.”
The League has campaigned on a platform of tax cuts and tougher migration laws, both of which have helped its popularity in Italy.
Yet the country is in breach of the European Union’s public debt rules, with government debt at over 130 per cent of GDP.
Under the EU’s rules, Italy is required to shrink its budget deficit – the gap between what the government spends each year and what it takes in taxes – each year until it becomes balanced. Yet it has grown every year since 2015.
Italy’s borrowing costs have fallen in recent weeks, however, after the European Central Bank (ECB) hinted that more stimulus was to come.
This has sent the yield on 10-year Italian government bonds falling to 1.4 per cent from over 1.6 per cent a month ago.
“Into year-end, however, traditionally, the Italian banks tend to reduce their government bond holdings (before re-loading their positions in January and February),” said Jefferies senior European economist Marchel Alexandrovich in a note.
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“Therefore, if political risk escalates, there may be questions as to whether the 2018 pattern of strong domestic buying will necessarily be repeated.”