Italy’s €10bn tax cuts to low-income earners will ‘help avoid contraction’

Prime Minister Matteo Renzi’s €10bn of tax cuts to low-income earners will allow Italy to narrowly avoid a contraction this year, his chief economic adviser has said.

“Without that measure, we would forecast an even worse economic scenario” than the 0.2% rise projected this month by the country’s central bank, Filippo Taddei, head of economic policy in Renzi’s Democratic Party, said.

“GDP would rise no more than 0.1% this year” with no intervention.

Earlier this year, Renzi’s government passed a labour tax cut worth €10bn annually in an attempt to revive domestic demand and spur growth after Italy’s longest recession since the Second World War.

Renzi admitted for the first time in an interview yesterday that 2014 GDP is unlikely to rise as much as the 0.8% estimated by the government in April.

Warning bells had already sounded with the Bank of Italy citing “considerable uncertainties” in its July 18 economic forecast, and the IMF’s World Economic Outlook update predicting a GDP increase of just 0.3% for the eurozone’s third-biggest economy.

“It makes sense to think that those new projections are the most likely ones,” said Taddei. Renzi “just acknowledged it.”

The country’s economy shrank 0.1% in the first quarter, marking a return to the contraction Italy had emerged from in the last three months of 2013.

Lacklustre growth could prompt economists to further cut their 2014 GDP forecast, bringing it in line with the 0.2% increase estimated by Italy’s central bank, Taddei said.

“Things could go worse, but also better than that, given that that GDP forecast is an average within a range of projections,” Taddei said.

“Pessimism is Italy’s national sport, but we can even expect something better than that.”

— Reuters