After rushing through round one of austerity measures for Italy back in July, Italy’s stock markets crashed.  As a consequence, a revised packet of austerity measures was cooked up during the summer.

After a considerable amount of uncertainty caused by proposals, counter proposals, adjustments and amendments galore, something finally appeared last week in Italy.  Confidence votes were used to push the raft of measures though both of Italy’s houses of parliament and proposals for further amendments were strictly forbidden.

Some of the austerity proposals will require constitutional changes to turn them into law and changing Italy’s constitution has never been an easy thing to do.

Here’s a brief summary of what’s in store for Italy austerity-wise plus a quick look at what effects the austerity belt-tightening may have on Italy and its population.

VAT is up 1% to 21%

The prices of fuel, clothes, footwear, televisions, computers and hair cuts is likely to increase.  There are some early indications that Italian businesses may absorb the VAT increase, but others may use the austerity increase to put prices up by more than 1%.

Other less obvious changes to the way VAT is charged are predicted to make life for Italy’s self-employed tougher.  Many of Italy’s professionals – lawyers, architects and engineers are not employed directly, but paid a fee as if they were external consultants.  These fees are often derisory.  Italy’s uncertain job market and under performing businesses ensure that “salary” levels are kept low.  And self-employed employees in Italy do not have the same rights, such as maternity leave, as actual employees.

It is expected that the VAT change, provided it does not bankrupt too many businesses, may raise around €4 billion to help reduce Italy’s ever increasing public debt.

Clamp Down on Tax Evasion

Those caught dodging tax on sums of 3 million Euros or 30% of their business’s turnover will find themselves in handcuffs.  Not only this, but the tax authorities can now go after evasion discovered up to 10 years after it occurred.  Previously, time barring provisions cut in meaning that even if evasion was found to have taken place, nothing could be done to recoup unpaid taxes.

As a result of tax law changes, it will no longer so easy for Italians to set up companies which act as tax reduction vehicles designed to reduce the amount of tax due on certain assets, such as luxury yachts.

Owing to Italy’s dubious record on dealing with the extraordinary levels of tax evasion which occur in Italy, some are not convinced the clamp down will achieve the targets set by the government.  The European Central Bank will be monitoring Italy’s progress closely.

Enrico di Mita, commenting on the tax evasion counter measures said that clear rules will be required to ensure targets are met.

The Italian government estimates that the anti-evasion measures will add around 1.6 billion Euros to state coffers.

Tax on High Incomes

Those earning, or rather, declaring, an annual income of over 300 thousand Euros will be expected to cough up more tax.

Initially, the proposal was to have affected Italians earning over 90 and 150 thousand Euros, but this proposal was amended.

The sum the so-called solidarity tax will raise is predicted to be around €144 million Euros.  Not a huge sum, but better than nothing.

Tax on Income from Investments

In particular income from investments is to be taxed more heavily.  A flat rate of 20% is to be applied to income and to the capital gains which result from the sale of certain investments.

Investments in government bonds and pension funds will continue to be taxed more leniently.

An intelligent move in some respects, as it may encourage investors to place their money in investments which will bolster government finances.  If everyone invests in government bonds as opposed to other forms of investment, then the forecast increase in income for Italy of around 1.9 billion Euros this measure is predicted to create may not occur.

Women’s Pensions

The pensionable age for women in Italy is will increase gradually to 65 by 2024 and to 68 by 2050.

This measure will save something like 90 million Euros annually, but only after 2015.

Pensions are a thorny subject in Italy and earlier proposals were ditched in the face of public outrage.

The savings from this section of the austerity package are not huge but, in compensation, should be virtually guaranteed.

Cooperatives – Fewer Tax Advantages

Italy has a surprising number of cooperative type businesses.  In 2007, according to Lombardy chamber of commerce research, 30 out of Italy’s 100 largest businesses were cooperatives.  There were 11,500 cooperatives in Lombardy in 2007 – 16% of the total number of cooperatives in Italy.  Around 800 thousand people work for cooperatives in the peninsula.

The recent austerity package is to cut down on the tax advantages of cooperatives in Italy.

Taxing cooperatives less favourably will create an income of 170 million Euros over the next three years.  As with the woman’s pension move, this is not a substantial amount.  And, of course, making the setting up of cooperatives less fiscally advantageous may dissuade some from doing so.  This may depress employment and have a negative effect on economic growth.  Existing cooperatives will no doubt evaluate the effects of the government measures and may react by cutting staff numbers.

Central Government Cuts

A general slimming down of ministries is forecast to generate savings of around 6 billion Euros for Italy.

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What will actually happen is anybody’s guess – Italy’s politicians are notoriously protective of their ivory towers so the actual savings are unlikely to be as high as the estimates.  Excuses will be made and all those affected will fight their corners.

Comments on the central government cuts revolve around the point that not enough fat is being cut away from Italy’s government’s chubby body.

Local Government Cuts and Reorganisation

Hotly contested, primarily on the grounds that Italy’s local government has already had to swallow significant cuts, this section of the austerity manoeuvre is predicted to result in savings of around 4 billion Euros.

Italy’s mayors, including a number of those who are allied to the Berlusconi government, are already up in arms over this section of the measures and have claimed that the effect on services will be drastic and damaging for Italy.

There is also a planned rationalisation of local government and certain smaller local government areas may disappear.  However, before the major reorganisation can be undertaken, Italy will require a change to its constitution and this will lead to consternation and endless disputes.  Then there is the cost of the mass reorganisation which does not appear to have been mentioned.

However, despite the howls of protest, the situation in Comitini in Sicily, a town with a population of 960 in which 64 residents of the same town work for the local council, suggests that there are huge savings to be made in local government in Italy.  The only problem, one suspects, is that many would lose their jobs and would have great difficulty finding alternative employment.

The level of savings achieved after all the compromises which are likely to be reached may well be less than the forecast 4 billion Euro saving.  On the other hand, if Italy were to go about the task of sorting out local government seriously, then the savings could well comfortably exceed 4 billion.

Other Bit and Bobs

There is a proposal to make it easier to sack people in Italy.  The idea is that by making it easier to dismiss malfunctioning employees, it will become easier for companies to employ full-time staff.  While this may happen, it is also likely that unscrupulous Italian bosses will use the threat of being sacked to ensure their employees give their all and them some.

Italy’s unions have given a provisional OK to the employment law changes which also include greater flexibility in negotiating employment contracts.

To push these changes it Italy’s labour laws through time consuming constitutional changes will be required.

Energy Tax

Energy producers will face a new “Robin Tax”.  This should generate more income for Italy, but may lead to energy price inflation, which in turn, may well result in price hikes across the board in Italy.

Reactions?

Emma Marcegaglia, the head of Italy’s employers association thinks little of the austerity measures which she has branded as being little more than lots of tax increases.  She has said she is very unhappy that little is being done to stimulate Italy’s stagnant economy.  It has to be said that the Berlusconi government’s record on this front has been unimpressive to say the least, and shows no signs at all of improving.

The biggest problem for the Berlusconi government at present seems to be pushing through a law to keep the Berlusconi bunga bunga party tapes out of Italy’s press.  This does not bode well for Italy.

Meanwhile, Berlusconi ally and leader of the Northern League party Umberto Bossi appears to want to push for secession for the mythical invented area of northern Italy which Bossi and his disciples like to refer to as Padania.  Bossi does not appear to be that confident in the benefits of the austerity measures and fought hard to prevent more radical changes to Italy’s pensions system.

Italy’s confusing opposition parties are not happy with the austerity measures, but they never are happy with anything the Berlusconi government does – unless its increasing their salaries, that is.

The ECB and EU are keeping Italy under observation and give the impression that while they are happy Italy has done something, they are highly uncertain as to the end results.

Italy’s financial markets are still very wary and their continued downward trend indicates that the austerity measures were not enough to restore confidence in Italy’s flagging economy.  There is also the grim question of Silvio Berlusconi’s credibility.

Standard & Poor’s Downgrade Italy

In the news today, September 20th, is that S&P have downgraded Italy’s Sovereign Credit Rating from A+ to A and one of the reasons given is a lack of confidence in the Berlusconi government and it’s austerity package.

From Standard & Poor’s report on the Republic of Italy (a copy of the S&P’s report can be downloaded from the Il Sole 24 Ore article):

The lowering of the long- and short-term sovereign credit ratings on Italy reflects our view of the Italian economy’s weakening growth prospects and our view that Italy’s fragile governing coalition and policy differences within parliament will likely continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges.

This S&P’s comment caught my eye too:

Nontariff barriers to foreign direct investment (FDI) are, in our view, the key reason behind Italy’s relatively low inbound FDI stock. At about 16% of GDP, it is less than one-half that of either France or Spain (36% and 43% of GDP, respectively) and lower than that of Germany (27%), despite Italy’s potential efficiency gains from economic scale within Europe’s common market.

I’ve written something about this already: Foreign Direct Investment – Italy Not in Top 15

Berlusconi was not happy with the downgrading and commented that the reality is different and that the downgrade is the fault of Italy’s press (which has merely been reporting what is happening in Italy – where Berlusconi controls around 90% of Italy’s media anyway!).

Reading between the lines of the S&P’s report, what is being said is that Italy is being badly managed.

Italians in general have yet to feel the true effects of the austerity package – it is very early days.

Everybody will be waiting for a few months to see how much their wallets feel.  Christmas spending levels in Italy may well show how hard, or not, Italians have been hit by the Berlusconi’s governments double barrelled austerity package.

What’s your opinion on Italy’s austerity measures?  Good, bad or too little, too late?  Comments welcomed.