Italy’s 2018 Budget

Italy’s 2018 Budget

December 24, 2017

lucia.cossaro@prometeia.com

The effect on the balance is an increase in the deficit of about €11 bln in 2018 and 2019, and of about €2 bln in 2020

 

The Italian Parliament approved the 2018 Budget. The Budget is composed by two parts, the Decree Law, passed on November 30, that anticipated some of the revenue-increasing measures, and the Budget Law. The overall effect on the balance, as indicated in the Draft Budgetary Plan (DBP2018) sent to the European institutions in mid-October, is an increase in the deficit compared to a current legislation scenario of about €11 billion in 2018 and 2019, and of about €2 billion in 2020. 

The new interventions are in line with the actions taken in recent years. Among the expansionary measures, supplementary funds are allocated to public employment, mainly for contract renewals but also for new recruitments, and to social policies. These include additional resources for the new “Inclusion Income” scheme [1] and for young people and families. In addition, the Budget extends the incentives to private investment, such as accelerated amortization and other incentives for innovation included in the Industry 4.0 National Plan [2], and confirms tax incentives for improving housing energy efficiency and for housing renovation. Social contribution relief is provided to support youth employment, and a new tax credit on spending on training activities is introduced. Finally, to strengthen public investment, the Budget raises the resources in favour of both the State Investment Fund and the local authorities. Part of the financing comes from spending cuts and, more significantly, from revenue gains expected from anti-tax evasion and collection measures. 

 
CHART A: Net impact of the budgetary measures (minus sign = financing) billions of euros 
 
Source: Prometeia's calculation on parliamentary documents
 
 

As usual, the resources involved in the budget are considerable. The expansionary measures planned for 2018 are more than €26 billion and the financing ones about €15 billion. The impact of modifying [3] the so-called “safeguard clause” is significant. In 2018, the deactivation of the clause is worth €16 billion, 0.9 per cent of GDP. It is considered an expansionary measure (i.e. a tax reduction) in the official evaluation, which compares its impact to the revenues foreseen under current legislation. However, this measure should not be taken into account when considering the differential impact that fiscal policy will have in 2018 compared to 2017. 

Therefore, in order to assess the actual impact on the economy of the 2018 Budget, figures presented in Chart A do not take into account changes to the safeguard clause or other measures that do not entail any variations compared to 2017. Based on this approach, most of the resources are redistributed to households, while the additional resources for investment and business are limited in 2018 (planning to become more substantial starting from 2019). 

 
CHART B: Fiscal Stance as planned by the Government (2018 Draft Budgetary Plan) % of GDP

Source: Prometeia's calculation on Ministry of Economy and Finance data
 
 
[1] See the Prometeia Discussion Note “The Introduction of Minimum Income in Italy: Challenges and Outcomes.”
[2] Launched in 2016, Industry 4.0 National Plan is a set of interventions designed to boost investment and promote productive technological change over the period 2017-2020, aiming at improving competitiveness.
[3] The safeguard clause is a provision entailing an increase in VAT rates worth €15.7 billion in 2018, €18.9 billion in 2019 and €19.2 billion in 2020. The 2018 Budget law cancels the increase in 2018 and maintains an increase of €10.4 billion in 2019 and €19.2 billion in 2020. 


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