Bloomberg News

Italy Must Avoid VAT Rise as Slump Deepens, Official Says

June 06, 2012

Italy must avoid a planned increase in the value-added tax this year as waning consumer demand helps push the nation deeper into its fourth recession since 2001, Finance Undersecretary Gianfranco Polillo said.

“The economy shows signs of strong deterioration,” Polillo told the Senate in Rome today. “In light of the fall in domestic demand, betting on a further VAT increase would be incomprehensible and even wrong.”

Prime Minister Mario Monti’s government is trying to achieve a structurally balanced budget by 2014 to convince investors it can tame Europe’s second-biggest debt. Following two fatal earthquakes last month, the Cabinet decided to pay for relief work with funds from an ongoing review of state spending that were originally earmarked for avoiding a VAT rate increase to 23 percent from 21 percent later this year.

Tax revenue in the four months through April was 2.9 percent lower than government forecasts, the office of the Treasury’s General Accountant said in a report posted on its website yesterday. Commenting on the data late last night, the Treasury said in a statement that it’s too early to say if the tax targets were missed and it expects higher revenue in coming months as a result of increased levies.

Weighing on Spending

The government raised taxes on property, gasoline and luxury items such as yachts as part of a 20 billion-euro ($25 billion) austerity package passed in December. The plan was aimed at balancing the budget in 2013, a target that was postponed by one year in April as the economy sank deeper into a recession.

The accountant’s report said that proceeds from VAT in the first four months of the year were 9.6 percent less than estimated by the government, based on projections in the Treasury’s economic and financial plan published on April 18.

“The problem is that VAT revenue is declining because because domestic spending is falling,” Giorgio Squinzi, the new leader of the country’s main employer lobby Confindustria, told reporters in Rome today. “If we raise the VAT rate further, we should expect a further decline in consumption.”

Parliamentary Affairs Minister Piero Giarda, who is in charge of the spending review due to be completed by July, declined yesterday to rule out a VAT increase, saying the earthquakes will make it “more difficult” to cut taxes.

The quakes will hurt industrial output in the Emilia Romagna region for as long as six months, Squinzi also said today. The affected area in the north “makes up for more than 1 percent of Italy’s gross domestic product, thus we risk an additional contraction of GDP just because of the quakes.”

-- Editors: Jeffrey Donovan, Dan Liefgreen

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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