Italy started to go bankrupt

Premier Mario Monti on Monday will present to parliament his emergency government's package of budget measures that aim to raise 30 billion euros and start to hurl the country out of its debt crisis. The package is contained in what Monti described as a 'Save Italy' decree after the cabinet approved it on Sunday.

It includes pension reform, the reintroduction of a property tax dropped by the previous administration, new taxes on luxury items such as yachts, sports cars and private aeroplanes, and a 2% increase in value added tax in the second half of 2012, taking it up to 23% in the top band.

The bill, which comes into effect immediately but requires parliamentary approval within two months, also features growth-boosting measures, such as tax breaks for companies who hire young people and for those investing capital in Italian firms. It did not include an expected income tax hike.

The most contentious part of the package regards pensions, with Welfare Minister Elsa Fornero breaking down in tears when she was outlining the changes at a press conference on Sunday. Next year pensions above 936 euros a month will not be raised in line with inflation. Furthermore, the retirement age was raised from 60 to 62 for women and from 65 to 66 for men. The minimum number of years of pension contributions needed to retire before the retirement age will increase from 40 to 42 years for men and 41 years for women.

''It's a very big blow to pensioners' incomes,'' said Susanna Camusso, the head of Italy's biggest and most left-wing trade union CGIL. ''The raising of the retirement age is an unsustainable extension for many people whose pension prospects have been disrupted and face many more years of work''.

Italy's business associations and many of its political parties, however, said the package was tough but necessary to restore investor confidence and respect commitments to balance the national budget by 2013 The European Union, which fears that the euro could collapse if Italy does not get a grip on its public finances, praised the measures.

European Financial Commissioner Olli Rehn said the package was ''timely and ambitious''. Former European commissioner Monti took over the helm of government as the head of a team of non-political technocrat ministers after Silvio Berlusconi resigned as premier last month, with Italy's debt crisis threatening to spiral out of control.

Monti said on Sunday that, given the gravity of the situation and the sacrifices his government was asking people to make, he would decline his salary as premier. The government said it planned further measures, including changes to the labour market to make it easier for young people to find steady jobs and new benefits. It said bills for these reforms will be presented after talks with the unions and business associations.

Italy would collapse without 'Save Italy' budget, says Monti Premier is confident of parliament's supportTax on First Homes, Higher Property Valuations and Pension Reform but No Income Tax Hike. Italy's IRPEF income tax stays unchanged, even for top earners. But wealthy Italians will face at least €12 billion in new taxes. The "Save Italy" decree, as the prime minister, Mario Monti, has called it, will extract a total of €18 million from Italian pockets to make the public accounts add up, balance the budget and promote growth with measures to kick-start the economy. The total impact of the budget is €30 billion, with €12-13 billion in cuts to public-sector spending involving welfare, regional, provincial and municipal authorities, and €17-18 billion in new taxes. Two thirds of the new levies will be on real property, in other words homes, and financial wealth, including sums repatriated under the "tax shield", as well as luxury cars, boats and private planes. Twenty billion euros of the €30 billion (€20 billion net) generated will go to reducing the public deficit and €10 billion will finance measures to stimulate economic growth, such as removing the IRAP regional business tax on the cost of labour and introducing tax incentives for company capitalisation.

Ring-fenced public accounts 
The government decree takes further steps to ring-fence €4 billion in savings already budgeted for 2012, €12 billion for 2013 and a further €4 billion in 2014. The money is expected to come from reforms to welfare and invalidity payments. If no alternative measures are forthcoming, the potential hole in the budget will be plugged with a 2% increase in the 10% and 21% VAT rates from June 2012, and a further hike of half a percent will follow in June 2014. Still on the subject of taxes, the government has announced a new increase in petrol duty from 1 January, part of which will finance public transport, and an increase in supplementary regional income tax (from 0.9% to 1.23%) to avoid cuts to the healthcare fund.

All this will underwrite a balanced budget in 2013, an objective that was fading from view with lower-than-expected growth in the economy. The government has now taken this into account in its review of forecasts. According to the new figures, the 2012 gross domestic product will shrink by 0.4%-0.5% and the new forecast for 2013 is for zero growth. This means further effort is required to achieve the government's objective of a deficit-to-GDP ratio of 1.6% in 2012 and parity the following year.

IMU on property from January 
The bulk of the budget's impact will be in new taxes on homes, which should bring in €7-8 billion. The unified municipal tax (IMU), which local authorities can levy under fiscal federalism, will be brought forward to January 2012. First homes will be affected by the tax. The basic rate for IMU has been set at 0.76% but for first homes it will be reduced to 0.4%. Mayors will have the option of raising or lowering the basic rate by 0.3%, and the lower rate on first homes by 0.2%, depending on municipal budget requirements.

IMU will be applied on the assessable value of the property, calculated on the basis of new coefficients. The assessable value of a residential property will no longer be calculated by multiplying the land registry value by 115.5, or 126 for second homes. The new coefficient is 160. Similarly, coefficients for commercial properties, land and development sites will also rise. Deputy economy minister Vittorio Grilli pointed out that it was tantamount to reassessing land registry values by 60%.

The return of the wealth tax on first homes only will bring in almost €5 billion in new revenue. However, IMU on second homes might even be less onerous than the current ICI with its effective average rate of 0.64% because the municipal tax absorbs IRPEF tax on income from property. IMU is due to be accompanied by a new tax on refuse disposal and services (RES) at a rate of 0.2‰, replacing the TARSU and TIA levies.

Taxing the rich
Although the income tax hike has gone, a welter of other taxes, apart from those on homes, will hit the well-heeled. The first is a one-off additional levy of 1.5% on amounts repatriated last year under the tax shield, which have already paid a 5% tax. There will be a tax on the mooring and dockage of large boats (more than ten metres in length), an ownership tax on private aeroplanes and helicopters, and an additional supertax on motor vehicles with engines of more than 170 kW.

And that's not all. Financial wealth will also have to contribute to the pot. Stamp duty on current accounts has been extended to the deposit of securities, and to other financial instruments and products, such as life insurance policies and mutual funds.

New social security reform
Unsurprisingly, the budget also brings yet another reform of pensions. From 2012, there will be no length-of-service retirement pensions and all pensions will be calculated by the pro-rata contribution system. The moving retirement "window" will go but the minimum pensionable age will rise to 66 for men and 62 for women. Regardless of age, it will be possible to take an "early" pension with 42 years and one month of contributions for men, and 41 years and one month for women. The index linking pensions to inflation has been reviewed. Pensions of up to twice the statutory minimum – in other words, up to about €950 a month – will be adjusted in full but all those in excess of that figure will be frozen.

Development measures 
The package includes about €10 billion of measures to finance development, starting with deductibility for IRAP regional business tax paid by companies on labour costs. Capitalisation is encouraged with tax incentives and the guarantee fund on loans to small and medium-sized businesses is to be beefed up. The decree includes new regulations to speed up the completion of infrastructures and for the liberalisation of trade, pharmacies, fuel distribution and the professions with the reform of professional associations. The new ceiling of €1,000 for cash transactions has been confirmed and the decree includes further measures to combat tax evasion. These are not punitive in nature. Instead, there are incentives and allowances for professionals and small businesses that implement full traceability for their revenue. Amnesties of whatever kind are categorically ruled out.

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