October 25, 2017 / 4:10 PM / a month ago

Fitch: Italy Regional Referendums Rekindle Fiscal Powers Debate

(The following statement was released by the rating agency) MILAN/LONDON, October 25 (Fitch) Last Sunday's referendums in Veneto and Lombardy are unlikely to lead to near-term changes in the financial relationship between the two regions and the central government, Fitch Ratings says. But they highlight a debate about the devolution of responsibilities, the allocation of associated financial resources, and ultimately the degree of Italian regions' fiscal autonomy. Both referendums saw strong support, among those who voted, for proposals to increase regional control of revenue and spending across areas such as healthcare, education and infrastructure. Turnout in Veneto was over 59%, compared with just under 40% in Lombardy. Regional leaders have said they will present devolution plans to the central government in the coming weeks. The region of Emilia Romagna is also trying to start negotiations following a vote by its regional assembly, while the region of Puglia is considering such an initiative. Whether and when talks start will also depend on political developments. We do not think detailed discussion of regional reform that could cut across numerous policy areas is a priority ahead of national elections due by May 2018 and elections in some regions, including Lombardy. Opinion polls suggest a fragmented parliament and difficult coalition dynamics. The Northern League, which governs in Veneto and Lombardy with Forza Italia and called the referendums, appears likely to be part of a centre-right coalition that will contest the elections. If it formed part of the next government, it could move regional reform up the political agenda, but we think any discussions would be lengthy. Sunday's referendums highlight a broader desire among Italian regional governments to resume devolution. This was planned before the eurozone crisis brought the process to a halt and prompted the central government to impose more stringent conditions on regional finances as part of its efforts to meet national government debt and deficit reduction targets. Restrictions include conditions on spending and the redistribution of tax revenue - for example, funds that are explicitly allocated by the central government for healthcare cannot be used to meet other responsibilities. We think any central government response to new proposals will be conditioned at least in part by the desire to contain very high public debt. We therefore think it is unlikely that any of Italy's 15 'ordinary status' regions will achieve a level of fiscal autonomy on a par with the five 'special status' regions (Valle d'Aosta, Friuli, Provinces of Trento and Bolzano, Sardinia, Sicily) in the medium term. These five regions' shares of national tax revenues are protected under the constitution, limiting the central government's ability to adjust them unilaterally, which is one of the reasons they can be rated above Italy's sovereign IDR. Conversely, ratings of 'ordinary status' regions are capped by the sovereign rating, which we affirmed at 'BBB'/Stable on 20 October. Although constitutional provisions link regional revenues to economic performance, the central government currently pools business taxes, a large part of the regions' share of personal income tax, and about 50% of VAT, to fund healthcare, which accounts for about three-quarters of spending on average for 'ordinary status' regions. If the financial relationship between the central government and 'ordinary status' regions eventually evolved towards more autonomy similar to that of the 'special status' regions, the sovereign rating cap could be lifted. Contact: Raffaele Carnevale Senior Director, International Public Finance +39 02 87 90 87 203 Via Morigi, 6 Ingresso Via Privata Maria Teresa, 8 20123 Milano Federica Bardelli Associate Director, International Public Finance +39 02 87 90 87 261 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email: stefano.bravi@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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