Italy’s cabinet approves budget, to cut taxes for middle-earners

Italy’s government approved a draft 2020 budget in the early hours of Wednesday that aims to cut taxes for middle-earners and crack down on tax evaders, while holding the deficit at the same level as this year, government officials said.

The package was agreed at a cabinet meeting of the anti-establishment 5-Star Movement and its centre-left coalition partner the Democratic Party. It will now be sent to Brussels for scrutiny by the European Commission.

The budget scraps a hefty increase in sales tax worth 23 billion euros ($25 billion), which had been scheduled to take effect in January, but which the coalition feared would push Italy’s already-stagnant economy into recession.

However, since setting the economic targets that provide the framework for the budget in September, the ruling parties have struggled to agree on many of the measures to adopt.

“It’s an expansionary budget, we are satisfied”, Prime Minister Giuseppe Conte said after the cabinet meeting. “It’s a substantial plan to combat tax evasion.”

The government approved income tax cuts for middle-earners, costing state coffers some 3 billion euros in 2020.

The finance bill aims for the 2020 deficit to remain at 2.2% of gross domestic product for a third consecutive year.

To help finance the measures, the government has put together a plan to curb rampant tax evasion, which costs the state some 109 billion euros every year, according to Treasury estimates.

The budget must be presented to parliament by Oct. 20 and approved in both houses by the end of this year. It remains to be seen whether it will be rubber-stamped by the European Commission.

The package sees the structural deficit - which strips out the effects of economic growth fluctuations - rising by 0.1 percentage points of GDP next year, reversing a commitment made in July to reduce it by 0.6 points.

The drive to combat tax evasion seeks to encourage the use of easily traced credit and debit cards rather than opaque cash transactions.

The plan had originally aimed to raise 7 billion euros, but Economy Minister Roberto Gualtieri said on Wednesday that had been lowered to 3 billion.

The budget draft seen by Reuters introduces sanctions of up to 2,000 euros for retailers and service providers that do not accept credit cards. It lowers to 2,000 euros from 3,000 the threshold above which it is illegal to make cash transactions. The amount is expected to be cut to 1,000 euros from 2022.

To encourage people to ask retailers for receipts, the budget also launches a lottery in which holders of the winning receipts, identified with a number, get a tax-free cash prize.

Such “receipt lotteries” have already been adopted in several countries including Portugal, Slovakia and Malta. A new “web-tax” on digital companies also aims to raise around 600 million euros each year, the draft showed.

The tax, applied on companies with annual global revenues of at least 750 million euros and digital services exceeding 5.5 million euros in Italy, obliges them to pay a 3% levy on internet transactions conducted in Italy.

Meanwhile, Italian loss-making airline Alitalia won a commitment from toll-road operator Atlantia and state railways Ferrovie dello Stato (FS) on Tuesday to come to its rescue provided a number of conditions were met.

The green light will avert the threat of liquidation hanging over the ailing carrier as an Oct. 15 deadline set by the industry ministry for a deal expires.

Two sources close to the matter said the Industry Ministry was expected to extend the deadline to give the sides time to iron out certain issues. It was not possible to obtain an immediate comment from the ministry.

Several hurdles still must be overcome before the third turnaround attempt in Alitalia’s history can be launched.

The state-driven plan involves setting up a new company to hold the good assets of Alitalia and receive a cash injection expected to be around 1 billion euros ($1.1 billion) from the rescuers.

In two separate statements on Tuesday Atlantia, controlled by the Benetton family, and FS said they would proceed with binding offers for the airline as long as a leading carrier was also willing to invest in the flagship carrier.

Atlantia and FS have been in talks since July with Delta Air Lines but on Tuesday mentioned neither the US carrier nor German carrier Lufthansa which has recently said it could be interested.

The two Italian investors said they were each ready to take a minority stake in the new Alitalia but added more work was needed to find a deal on a business plan and a governance structure.

An investment by Atlantia in the airline could help mend fences with Rome following threats by the ruling coalition 5-Star Movement to revoke the group’s motorway concessions after a bridge collapse last year that killed 43 people.

Reuters