October 13, 2014 / 12:56 PM / in 5 years

Italy's Renzi announces tax cuts as EU scrutinizes budget

ROME/BRUSSELS (Reuters) - Italian Prime Minister Matteo Renzi on Monday promised sweeping tax and spending cuts to help boost growth and jobs next year, as the European Commission considers whether to reject his budget plan for reducing debt too slowly.

Italy's Prime Minister Matteo Renzi arrives for a conference on jobs with European partners in Milan October 8, 2014. REUTERS/Stringer

Speaking to a conference of business leaders, Renzi said he would reduce taxes by 18 billion euros ($22.8 billion) in 2015, with 6.5 billion being set aside to slash a widely criticized regional labor tax known as IRAP.

“It’s the biggest tax reduction ever attempted,” Renzi said.

Another 10 billion euros would go to extending an income-tax cut for low earners introduced earlier this year; 1 billion euros for tax breaks to companies that hire new full-time staff; and 500 million euros to help families, Renzi said.

He also announced 16 billion euros in cuts from a spending review in the budget, due to be unveiled on Wednesday just in time to meet an EU deadline, but gave no details.

The premier announced the cuts as the European Union weighs whether to ask Italy, now back in recession for the third time since 2008, to do more to rein in borrowing.

Italy’s public debt is the second highest in the euro zone as a percentage of GDP, and it has risen steadily to record highs above 130 percent of national output.

The budget plans, which include 11 billion euros in additional new borrowing next year, will delay the reduction of this debt pile, potentially setting Rome against the European Commission, which monitors national budget plans.

But the government could slightly adjust its plans if the EU wants it to further rein in borrowing, Treasury Undersecretary Enrico Zanetti said earlier on Monday.

EU sources have told Reuters the European Commission will probably reject Italy’s multi-year Stability Programme as it stands because of Rome’s decision to delay balancing its budget in structural terms until 2017.

Zanetti declined to confirm or deny that Italy had been asked to amend its plans, but he told Reuters that “having to discuss with the EU at most a few percentage points is not such a terrible thing.”

France, the euro zone’s second biggest economy, announced in September it would aim to bring its deficit below the EU ceiling of 3 percent of GDP by 2017, four years later than originally planned. Renzi has sided with Paris in its tussle with the Commission and Germany, who continue to argue for budgetary rigor rather spending more to boost the economy.

Earlier on Monday, the Bank of Italy appeared cautiously to back the government, saying a delay in fiscal consolidation could be justified if it were used to lift growth effectively.

EXPANSIONARY PLANS

Renzi last month raised the target for Italy’s 2015 deficit from 1.8 percent of GDP to 2.9 percent, right up against the EU limit. Italy’s Stability Programme has also put back by a year a commitment to balance the budget when adjusted for the effects of the business cycle and one-off items.

The program envisages only a marginal reduction in the structural deficit next year of 0.1 percent of gross domestic product (GDP), compared with a 0.5 percent correction requested by the Commission.

“If there should be requests from the EU, we will discuss them, but in any case they are requests which would certainly not upset the general framework of the budget,” Zanetti said.

Renzi, who wants the EU to ease its current fiscal rules to allow more public investment, scored one success last week, winning a confidence vote in parliament that allows him to move on with plans for more flexible hiring and firing by businesses.

The chairman of the euro zone’s finance ministers, Jeroen Dijsselbloem of the Netherlands, said in Brussels that as far as enforcing EU rules was concerned, Italy’s situation was different to France’s precisely because its deficit was still inside EU limits.

The European Commission, supported by Germany, says only by cutting its annual budget deficits can Italy rein in the debt. Renzi says debt has risen because of persistent recession, which is only exacerbated by fiscal tightening.

Italy, the euro zone’s most chronically sluggish economy, says it needs extra budget leeway due to the “exceptional circumstances” of its third recession in the last six years.

However, recession and stagnation have become the rule rather than the exception for Italy, which has posted average growth of approximately zero since the start of the century.

Writing by Gavin Jones and Steve Scherer; Editing by Mark Trevelyan

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