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Network News • 13-04-2023

Italy: fiscal probity, lower taxes and hydrogen

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 13th April 2023

Having witnessed Russia invade Ukraine, there is an aura of austerity in the air. Populist politicians are beginning to understand that they can no longer promise generous subsidies and low taxation without risking the mistrust of institutions such as IMF and The Commission.

Italy is an exception. It is trying to buck the trend and aware of promised EU recovery funds, wants to cut taxation and help rise below average salaries earned in the south of the Peninsula. The new prime minister, Giorgia Meloni, is walking a tight rope. She wants to cut personal taxes and introduce a simpler flat tax to generate new business and boost its gdp.

The government still plans to continue its cautious management of the country’s public finances and is aiming for a 2023 deficit target of 4.35% of GDP. That is down from a restated 8% deficit last year, after revisions caused by a reassessment of how to account for tax breaks.

If Meloni fails in her task, her coalition partners will, as expected, blame political detractors, when they find themselves facing a grim reality that the medicine needs longer to cure the patient. As always, fiscal and monetary orthodoxy should always prevail in the long term unless a permanent cure is found.

Italy suffers from chronic low productivity and fiscal mismanagement.  As a significant member of the Eurozone, Italy bears collective responsibility to reign its deficits, more so now that the era of low interest and cheap money is over.  It borrowed extensively (latest $3076 billion - upwards of 140% of GDP) to support its social security system and chronic deficits.

The Italian political scene never ceases to confuse economic observers. With the election of the first mainly right-wing government, many wonder how the new prime minister Giorgia Meloni would manoeuvre her way in the execution of a tight budget.  She had to keep to an electoral promise of decreasing taxes.  In contrast, she also had to keep the EU on her side to ensure that the promised recovery funds agreed with her predecessor Mario Draghi will indeed be forthcoming.

The genie came out of the bottle when she announced an exciting flat tax regime. This flat tax does not cover any Italian sourced income, as these sources will be taxable at ordinary progressive tax rates yet legal observers state that such a regime, can be a novelty to attract rich expatriates, once used in combination with the new residents’ tax regime. Most excitingly, it is expected that the new residents tax regime allows for a reduction up to 90% of Italian taxable income for new foreign residents.

Can Georgia Meloni square the circle? She somehow found the right balance after several U-turns on introducing a flat tax, introducing new limits for cash payments, and the use of point-of-sale machines. Still, one would have to be a committed optimist to believe that the present government will make a significant dent in the mountain of public debt that makes Italy one of the weakest countries amid large EU member states.

The good news is that a flat-tax regime for the self-employed would be extended so that those with gross earnings of up to €100,000 would pay as little as 15%. The right leaning partners in her coalition also pledged early retirement for some and an increase in minimum pensions and child benefits. Many ask how can such pennies drop from Heaven?  Will Italy sustain such fiscal reforms?

Economists are bullish, saying the morale of living a better life will boost productivity, cut tax evasion and generate new jobs particularly for youth in the south.  Since the programme would boost growth, wages, profits and thus the tax take, there was no need to worry too much about fiscal sustainability. The dolce vita will take care of all the worries announced by doubters against such a promiscuous tax reform.  In truth, facts are there for all to see.

Way back in 2019, an Italian Budget Law introduced a new favourable regime providing for the application of the individual income tax at 7% flat rate on all non-Italian source income earned by foreign pensioners transferring their tax residence in the southern regions of Italy. Then, as can be expected the flat tax regime was optional. It was available for the year in which the transfer of tax residence occurs and for the following 9 years.

The bold plan to be veiled by premier Giorgia Meloni foresees economic expansion of 0.9% this year, up from a previous estimate of 0.6%.  Next year growth is projected at around 1.4%, down from a prior estimate of 1.9%.

Let us now switch to discussing climate change and how Italy has invested heavily in renewables particularly in the southern region. The main driver of climate change is human activity and our dependence on burning of fossil fuels like coal, oil and gas. When we burn fossil fuels, we generate greenhouse gas emissions that act like a blanket wrapped around the Earth, trapping the sun’s heat and raising temperatures.

Everything we do, including the way we warm our homes, manufacture our goods, aviation and mass transport across the world and more, runs off of these three main fossil fuels. It goes without saying that Italy is a sunny country, and solar energy is an important part of its energy mix. Both sun and wind are most abundant in the southern part of the country, including the islands of Sicily and Sardinia.

Renewable energy sources account for around 36 per cent of consumption (Malta 11.5%).  Hydropower is the largest renewable source at 38 per cent, followed by solar power at 23 per cent and wind power at 13 per cent.  Thanks to the generation of solar and wind power, the use of such energy to generate hydrogen via large scale electrolysis will act as a replacement of natural gas.

What are the other consequences if climate change is ignored? The answer includes rises in sea levels and severe storms. The Guardian reported a study that showed twice as much sea level rise over the last 20 years on Italy’s Amalfi Coast and Spain’s Costa del Sol. With billions of people living in coastal regions, flooding caused by rising sea levels is one of the greatest long-term impacts of the climate crisis.

Italy must also work to change its habits, for example by switching to electric cars and running its factories using hydrogen. Noticing how the peninsula is set for a fiscal and energy revolution, we wish its prime minister Meloni all the support she needs to follow her ambitious dream.

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 13th April 2023
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