WRITTEN QUESTION P-4080/97 by Luigi Florio (UPE) to the Commission (18 December 1997)

Subject: Italy's finance policy and the Maastricht criteria

Under the 1998 finance act the Italian Government is preparing to introduce a new tax known as IRAP (= regional tax on production).

The significant features of this tax are that it will fall particularly heavily on natural and legal persons who employ staff and who have contracted debts (neither the wages paid to employees nor the interest incurred on debts are tax-deductible under IRAP) and that it cannot be offset against income tax.

This new tax will further increase the fiscal burden in Italy, a country which has already had to suffer one and a half years of financial juggling involving a total of 100 000 billion lire, most of it raised from additional taxes.

Does the Commission consider such a policy to be compatible with its own recommendations designed to reduce public expenditure and, consequently, the fiscal burden, particularly employment-related taxes?

Furthermore, what view does it take of the Italian Government's social security policy, which seems incapable of effectively rationalizing the accounts of the INRS (= national social security agency), despite its repeated announcements of its intention so to do?

Lastly, does the Commission believe that, in view of the above, Italy will be able to achieve and maintain the Maastricht financial and economic criteria in 1998 and beyond?

Answer given by Mr Monti on behalf of the Commission (3 February 1998)

The Italian tax reform was approved only recently and estimates of the exact financial impact of the reform across regions, categories of tax payers and sectors are extremely difficult at this stage. For the time being, the only elements available are the estimates provided by the Italian government, which show that the new system is not increasing the tax burden. As for the impact on the cost of labour, on the one hand labour is included in the base of the new tax, on the other hand the tax replaces health contributions which were also levied on the labour factor. The net effect can vary across enterprises, but does not necessarily imply an increase in labour taxation. Whereas the Commission is obviously interested in the design and in the budgetary implications of the reform, an assessment of the local tax policy of national governments does not fall within the competence of the Commission.

The Italian pension system was affected by two reforms, in 1992 and in 1995, and has been further revised in the framework of the 1998 budget law. These interventions have deeply modified the mechanisms of the pension scheme and brought under control pension expenditure in the medium-term. The ratio of pension expenditure to gross domestic product (GDP) is now likely to remain stable during the next ten years. In time, when the so-called baby-boom generation retires, further corrections may become necessary. In the short and medium-term, a more rapid transition to the new system established with the 1995 reform, would have made available more resources for improving welfare provisions in other areas in which social expenditure is well below Community standards.

The commitments contained in the convergence programme for the period 1998-2000 were positively assessed by the Commission and by the Council. The Commission is now examining the content of the budget law for 1998 in order to assess the quality of the measures adopted and the consistency with the commitments included in the convergence programme.