In the face of fears that Italy may be the next European country to default, Italy sort of got its act together and cobbled together a raft of austerity measures, which for the sake of argument, I’ll call austerity measures mark one. Well, the mark one austerity package which was rushed though Italy’s parliament in July was not enough and was not welcomed, despite Prime Minister Berlusconi’s assurances that Italy’s economy is as solid as a rock.
Note that this article will be updated as the situation evolves and, hopefully, becomes clearer.
The markets found Berlusconi’s speech distinctly unconvincing – which did not come as a great surprise – I heard the speech and found it utterly unconvincing too.
Well, right after Berlusconi’s reassuring speech which didn’t, Italy’s markets continued free-falling, and as the markets crashed, so did worries that Italy would do the same. Effectively, the markets had voiced their opinion on Italy’s first round of austerity measures, some of which were not due to come into force until 2013 – which just so happens to be the year in which the Berlusconi government comes to its natural end.
As most know, austerity measures have a reputation for being about as popular as being boiled alive in (olive) oil. Berlusconi knows this full well, and he realises that a government which passes tough measures is unlikely to be favoured by voters at election time – hence the delaying of certain cuts until what may have been after general elections. Nice try Mr B, but Italy’s fragile economy cannot wait that long.
Really, Berlusconi only has himself to blame – his government appears to have passed the last few years slithering from one scandal to another, passing laws which only appear to benefit Italy’s leader and not doing too much else, all whilst endlessly broaching the subject of reforms which weren’t. Unsurprisingly, all this active inaction, combined with the international economic crisis, has left Italy in a very shaky position indeed. One report in Britain’s Guardian was entitled: Silvio Berlusconi may have screwed Europe – not just Italy. Say no more, except someone apparently did.
It is rumoured that the European Central Bank sent a letter to Berlusconi. The contents of said letter, if indeed it ever existed (some wonder whether the letter was a face-saving invention), have been kept secret, but something must have happened and pressure must have been put on Berlusconi to pull up his socks and do something concrete to convince Europe (and the world) that Italy can avoid ending up in the same devastatingly rough seas as Greece now finds herself in.
There is also the problem that whereas smaller economies can be bailed out, as in the cases of Ireland and Greece, Italy’s economy is simply too big for it to be given a financial helping-hand – and doing so may spell the end of the European Union. In short, someone put the frighteners on Silvio and he decided to act.
Indeed, Italy’s tanned party-loving Lothario cut his August break short and rushed back to Rome to work on Austerity Measures Mark two.
Here is a summary of the more significant austerity measures which are being proposed in the Mark Two version:
- TFR employment termination payments are to be delayed for two years f0r public sector employees. In Italy, after a period of full-time employment, employees who leave, or who are forced to go, are entitled to an end of service payment.
- Performance related thirteenth salary payment for public sector employees. It’s an Italian thing. Salaries in Italy are often divided into 13, or more, monthly payments. What is being proposed, but has not been fully approved, is that if those working in public sector do not meet certain efficiency targets, they will not receive their 13th payment. While this may increase efficiency, it’s likely to make any savings somewhat hard to predict. In theory, nothing could be saved at all. Very odd.
- The “solidarity contribution”. A fancy name for what is really a temporary tax increase. This tax increase will last for three or so years and will only effect those earning €90,000 or more a year. The details are that Italians earning more than €90,000, whether employees or self-employed, will have to pay, in real terms, 3 to 3.5% more in tax. Additionally, Italians who take home more than €150,000 a year will pay another 6 to 7% in tax. Update – 25th August 2011: The threshold for this tax may be raised to those who declare an income of over €200,000 a year.
- While it seems to be a rumour, it sounds as if invalidity pensions are likely to face the chop. The amounts paid out will be reduced in order to save Italy a cool €24 billion. This measure is likely to prove highly unpopular and the Berlusconi government knows this – it’s keeping mum as to whether or not it will happen.
This proposal has led to a storm of protests from Italy’s opposition who argue that this measure will punish those who are already dutifully paying taxes. Italy’s legions of tax evaders; who get away without paying some €120 billion annually; will continue to underpay. Apparently certain types are already driving to Switzerland with suitcases of cash to stash in anonymous bank accounts in the land of holey cheese and cuckoo clocks.
Trying to Deal with Mass Tax Evasion
There are some anti-tax evasion measures within the latest austerity proposals which might up tax income for the government. Maybe. For what it is worth, I feel that the best way of dealing with the Italian propensity for not paying taxes is to increase the number of indirect taxes.
If people refuse to pay taxes directly, then make them pay indirectly. Add a nominal tax to supermarket shopping and everybody will have to pay. Doing the same in Italy’s smaller shops is much harder, as receipts are not always issued. I don’t know if any cross checking is done regarding stock levels and actual income, but it sounds as if this is not done. It may not be too easy to do either, but computerised systems could aid the setting up and efficiency of such a monitoring system.
Example: A bar buys 10 kilograms of coffee. This will make 1,428 cups of coffee (7 grams is the ‘dose’ per cup). The price of a coffee is known, so the income from 10 kilos of coffee can be calculated. If the tax declared is not equal to a percentage of the overall profit on sales of cups of coffee, then something needs investigating. The big fly in this ointment is that there are literally thousands of coffee sales outlets in Italy.
The only other way to get round low declarations is to force people to use electronic payments for just about everything. This would not be popular, but could be done and the technology to do it exists now – as anyone who has used an Italian bancomat payment card will know.
There is an odd system in Italy called “sector studies”. What happens is that different categories of self-employed work are analysed and a theoretical income is calculated. Imagine you work as a web designer. A sector study may determine that you can earn €40,000 in a year and that you will pay tax based on this level of income. Now, if you declare €10,000, you may fall foul of the sector study which will force you to cough up the taxes it is believed you should have paid. Of course, if you have evaded taxes then you will be caught fair and square. However, if you are honest, you may end up facing a high and unexpected extra tax bill. Not nice.
Stop reading, start speaking
Stop translating in your head and start speaking Italian for real with the only audio course that prompt you to speak.
Accountants in Italy usually know something about these sector studies and can advise on how not to fall foul of them.
Another of the many austerity measures under consideration concerns these sector studies and using them to ensure that the self-employed pay their tax dues.
Other Austerity Proposals
- There is talk of the “solidarity contribution” tax increase being replaced in part by a 1% increase in IVA (VAT), but there are worries that this may have a negative effect on consumption.
- Italy’s well paid politicians are going to be asked to make a “solidarity contribution” too. Furthermore, politicians who lead a double life as lawyers, notaries, accountants, doctors, and others, will have their parliamentary salaries cut by half – if their earnings from their other jobs are equal to or exceed the €7000 monthly base salary paid to politicians by 15% or more.
- Some 22 out of 109 Italian provinces will disappear, or rather, will be absorbed into bigger neighbours. The number of provinces which may be abolished seems to be falling daily, though.
- Italy has around 8,100 comune – small local council areas with mayors and small numbers of administrative staff. Some 7,400 of these councils preside over areas with populations of less than 15,000 people. The Italian government may cut the number of comune in an attempt to reduce public spending levels.
- 20th August 2011: There is talk of selling off Italy’s real estate assets, the value of which is estimated to be around €500 billion. To whom, what and how much, is still being discussed.
There are many other bits and austerity bobs, including cutting the number of public holidays enjoyed in Italy. However, in common with the ever diminishing number of Italian provinces which are likely to face the chop, certain exceptions are being made to keep certain friends, and tourism operators, content.
Italy’s finance minister, Giulio Tremonti, who is also behind the austerity package, wants to introduce a Eurobond. This financial instrument, or so Tremonti believes, would have helped Europe avoid the crisis as it would/will serve to reinforce public finances at a Europe-wide level. Now though, it appears as if Germany is not overly happy with the prospect of a Eurobond. This may land Italy in hot water.
Sacking May become Easier
One interesting possibility is that the latest austerity package may make it easier for Italian companies to sack employees. Italy’s notoriously finicky unions are kicking up a fuss over this proposal though. Strike action is being proposed. Perhaps the unions might like to jump on the austerity boat and cut the amount they take in union-subs from their members? Not likely to happen – Italy’s unions executive management seems second only to Italy’s politicians for juicy benefits.
What I do know is that when companies in Italy can no longer afford employees, politely asking them to go can be extremely expensive.
Of note is the proposal to end the electronic monitoring of refuse. This measure met with the opposition of Italy’s environment minister who feels that Italy’s ecomafia will go dumping who knows what, who knows where all over Italy. Not an environmentally friendly measure and not that intelligent either, seeing as Italy already has considerable problems with illegal dumping.
In what has been dubbed a “Robin Hood Tax”, Italy’s energy producing companies, including those which generate energy using renewable sources, are to be asked to pay more tax.
The sum total Italy hopes to save amounts to around €45 billion.
Another aspect of Austerity Mark Two is that some of the cuts which had been postponed to 2012/2013 have been brought forward.
Not Done and Dusted
All of the above are really only proposals. Nothing is definitive just yet – but it is hoped that it will become so within 60 days or so. As to what the actual austerity package will end up containing, that’s anybody’s guess. And the measures may bring down Berlusconi seeing as some within his own ranks are reportedly unhappy with a number of the proposals. Italy’s opposition parties are not too keen on what is on the second part of Italy’s austerity menu either.
Berlusconi himself has faced accusations that Europe has dictated terms to Italy and that consequently Berlusconi’s government has lost its authority over the nation: cue calls for Berlusconi to step down. As usual, he has not. Instead he’s been singing a song that Europe is happy with the second round of proposed cuts.
What Berlusconi is unhappy about is that he has stated repeatedly that he would never put his hand into the pockets of Italy’s people. Indeed, at the same time he’d been continually promising tax cuts. Now it looks as though he’s about to dig rather deeply into Italian pockets. As for those tax cuts, forget it.
The Austere Grand Total
Well, it’s a provisional total, but as at 20th August 2011, the amount being bandied about is €55 billion, possibly as much as €75 billion – up from the €40 billion austerity package round one is supposed to raise/save.
There still lies the major problem of kick-starting Italy’s sludgy economy. Austerity Measures, the sequel, doesn’t appear to contain much to achieve this – or maybe I’ve missed something. If I have, do please let me know.
Source, in part Il Post – A Round Up for those Who Were Away – in Italian.