Austerity Leads to Tax Cuts in Italy

The Italian government’s austerity program is bearing some fruit for the Italian people.  Because of the spending cuts by Prime Minister Mario Monti, in continuation of the efforts of his predecessor, Silvio Berlusconi, Italy can now afford to cut taxes.  The government announced another round of spending cuts and tax changes.

Monti’s government was unable to attain its goal of delaying an increase in the value added tax (a kind of salees tax), but will cut the increase in half, (1% instead of 2%).  But the surprisingly good news is that it will also cut income taxes for the two lowest tax brackets by 1% each.  Although the tax cuts are small, it is hoped that they stimulate economic growth, which has been anemic in Italy, as it has been in Europe generally.  With more growth, people earn more, which generates additional tax revenue that more than makes up for the cut.

There will be some eliminations of business tax loopholes, but also additional tax incentives.

The spending cuts, which are on track to eliminate the Italian government’s budget deficit by 2014, when it can then begin to pay down its massive national debt, have also lowered the state’s borrowing costs to more manageable levels.  The spread between benchmark German bonds and Italian bonds (i.e. the premium required by bondholders in interest payments in order to hold the riskier debt) is at a level of about half of what it was at the peak of the fiscal crisis.  The lower interest payments the government must pay helps further to eliminate the deficit.