Italy’s Strategy for Fiscal Consolidation and Growth

Italy’s Strategy for Fiscal Consolidation and Growth Italian Government November 2011- July 2012

Fiscal consolidation Italy’s budgetary consolidation at a glance A cumulative budgetary consolidation effort of €80 billion, or 5% of GDP, between July 2011 and 2014 To achieve a budget deficit of 1.7% in 2012 after a result of -3.9% in 2011. This means a primary balance (before debt service costs) of 3.5% this year General government account on balance, in structural terms, in 2013 Debt to start decreasing in 2013 from a forecast of 123.4% in 2012 A full 3 percentage points of GDP represent Italy’s share of the assistance to GR, IE and PT as well as ESM capital

Crisis and Italy’s economy Modest deterioration in Italy’s public deficit during the crisis

Crisis and Italy’s economy Debt-to-GDP increased mainly due to economic crisis

Fiscal consolidation Primary surplus at 5% of GDP or above from 2014 onwards

Fiscal consolidation Main budgetary consolidation measures Re-introduction of a property tax (IMU) Higher excise duties on fuels and taxation of luxury goods Sizeable savings from a pension reform that rises statutory retirement age (SRA) to 66 years in 2012 (further increase to 67 already in law); automatically indexes SRA to future gains in life expectancy; and curtails early retirement All but modest pensions frozen in 2012-13 Reduction in social security and local government spending, namely through a territorial reorganization (abolition of many provinces)

Fiscal consolidation A spending review to increase quality of public finances After a thorough review of public spending, the government in June announced savings of €26 billion between 2012-2014. Such savings will prevent the increase by two points of the 10% and 21% VAT rates, which would have been the second increase in one year and further depressed consumption and economic activity The savings will come from sourcing all purchases of services and goods through a central-purchasing agency; reducing public sector employees and territorial organization, among other measures More savings to be announced soon as the government carries a review of business incentives and the financing of political parties

Fiscal consolidation Fight against tax evasion Ban on cash payments of €1,000 or more Tax evasion or misreporting of taxes becomes a criminal offence Increased surprise, targeted spot checks for search of undeclared revenues and VAT frauds. But less intrusive controls for citizens and firms seen complying Increased crackdown on undeclared work through a closer cooperation with the authority that collects salary-linked social security contributions

Fiscal consolidation Measures to reduce debt faster At least €10 billion expected in 2012 from CassaDepositi e Prestiti(CDC) purchase, at market prices, of government shares in Fintecna, SACE and SIMEST. CDC to advance 60% of the estimated value Real estate properties, including military barracks, worth an estimated €1.5 billion transferred to a real estate fund with the aim of selling properties or create value Planned State and local property disposal is expected to yield €15-20 billion revenues over 5 years

Growth: primary target Reforms for growth: a more competitive economy (1) Abolition of minimum fees for professional services; increase in number of professionals (e.g. notaries, pharmacies, taxis) Spin-off of gas network SNAM from incumbent gas supplier; more competition also in transport and other network sectors Ban of same sector multiple board membership (e.g. financial) Deregulation of retailers’ opening hours Greater freedom for petrol stations to source supplies of oil and products sold in convenience stores

Reforms : more efficient, less costly administration (2) Most administrative procedures by citizens and firms carried out online, includingsimpler, faster and more transparent procedures for public tenders. Public administration’s supplies of goods and services must go through a central-purchasing agency Creation of limited liability companies made easier and cheaper All local public services submitted to open, public tenders; privatization of firms that derive more than 90% of sales from controlling administration Public sector employees to decrease by 10% (20% at managerial level);holidays must be taken or are lost (cannot be ‘monetized’) Territorial reorganisation (near elimination of provinces in some cases replaced by leaner, more efficient metropolitan areas) Liberalization measures and administrative reform to increase growth by a cumulative 2.4% between 2012 and 2020, Growth: primary target

Reforms for growth: a speedier, reinforced justice (3) Creation of a special court to handle business disputes; Reduction in number of small courts to increase efficiency and cut costs Trial length: trials should not last more than 3 years in first stage, 2 years in appeal and 1 year at the Supreme Court. Additional years will give rise to set compensation amounts Reinforcement of anti-corruption measures Rule of law strengthened, in particular through increase in penalties for corruption of judicial proceedings Growth: primary target

Reforms for growth: a more flexible and fair labour market (4) Before the reform: low labour market exit flexibility, weak social safety net, insiders/outsiders dualism, generation and gender segmentation, geographical divide (North/South) Unemployment benefit system for all, but less generous Active labour market policies to improve job placement and increase incentives to work Better regulation on hiring side to make flexible, open-ended contracts the norm and apprenticeships the main market entry channel Growth: primary target

Reforms for growth: a more flexible and fair labour market (5) Reform introduces a fast, compulsory, out-of-court settlement procedure to handle disputed dismissals for economic or other objective reasons. If conciliation fails and: if economic dismissal not justified, the compensation will be capped at 24 month wages. No limit before. if reasons found ‘clearly non-existent’, a judge may decide for reintegration of worker plus a maximum 12 month wages compensation. Also no compensation limit before. Firms no longer obliged to pay social contribution arrears. Growth: primary target

Short-term measures for growth On top of reforms, great emphasis was put on growth-friendly consolidation and, whenever possible, on measures for growth and job creation, namely: Lower taxes on reinvested capital and hiring young people and women Government guarantees to foster SMEs access to credit Acceleration of payment of late bills to public administration suppliers Bridging of digital divide and spreading of ultrafast broadband Better R&D support schemes; improved academia-business cooperation to achieve quality research; tax credits for hiring young researchers Increased funds for, and streamlined approvals of, infrastructure projects Growth: primary target

Euro area crisis is harming the economy The excessively-high financing costs, due to the perceived euro area risk, and the budgetary contraction are having negative effects on the economy: Recession in 2012 could be -2.0%, according to recent forecast by Bank of Italy versus -1.2% in the government’s April Stability Programme (-1.9% in IMF’s spring forecasts) IMF estimates Italy’s interest rates are 200 basis points higher that economic fundamentals suggest. Each 100 bp costs additional €20 billion in debt servicing costs over time Companies are also seeing their financing costs growing more than is justified by their balance sheets, simply as they reflect Sovereign costs. Crisis and Italy’s economy

Italy’s Strategy for Fiscal Consolidation and Growth