Economic Priorities and Policy Challenges in the First Year of Giorgia Meloni’s Government

In the inaugural year of Giorgia Meloni’s center-right government, addressing the soaring energy costs and mitigating the impact of inflation on households and businesses became the focal point of economic policy. The global economic landscape significantly influenced the government’s decisions, as the ongoing conflict in Ukraine, which followed two and a half years of the Covid-19 pandemic, triggered inflation across the Western world. This inflationary pressure prompted central banks, including the ECB, to adopt aggressive monetary policies, with the ECB implementing ten rate hikes in just fourteen months in an effort to combat inflation.

The Italian government, taking a ‘hawkish’ stance, emphasized that monetary measures alone were insufficient and needed to be coupled with strategies for economic growth. Despite challenging economic circumstances, macroeconomic indicators indicated a relative stability in the Italian economy, even in light of lower wages compared to the European average, notwithstanding a slowdown in the latter half of 2023.

Under the leadership of Minister of Economy Giancarlo Giorgetti, the government focused on several key areas, including energy, income levels, active labor policies, and divestment of certain state-owned assets. Notable actions included initiating the sale of a minority stake in Ita to Lufthansa for 325 million euros and opening negotiations with the KKR fund for the acquisition of Tim’s network.

To secure the necessary resources, the government made the difficult decision to discontinue two hallmark measures previously enacted during Giuseppe Conte’s tenure. These measures, citizenship income (replaced by inclusion subsidies and training-work allowances) and the Superbonus building program, had been maintained by Mario Draghi’s government, sparking significant political debate and differing opinions across party lines.

Additionally, the government introduced two temporary taxation measures in response to the evolving economic situation. One involved an extraordinary tax on excess profits for energy companies at the end of 2022, prompted by rising energy bills. The other, scheduled for the summer of 2023, targeted banks following the ECB’s interest rate hikes. The latter measure faced scrutiny in parliament, with ongoing discussions aimed at revising and potentially reducing the tax burden, considering concerns about its constitutionality raised by Senate experts.

The Meloni government assumed office at a time when gas prices had reached record highs, and it immediately sought ways to support lower and middle-income households and businesses grappling with astronomical energy bills. Approximately two-thirds of the resources allocated in the initial budget were dedicated to this objective. Furthermore, the 2022 budget raised the limit on the use of cash from 1,000 to 5,000 euros and introduced temporary measures like the women’s option and quota 103 to facilitate early retirement.

Subsequently, the government shifted its focus to tax reform, with the approval of an enabling law in the summer of 2023 aimed at simplifying the tax system for citizens. This legislation, to be followed by implementing decrees within 24 months, aims to gradually reduce individual income tax rates, eventually consolidating them into a single rate. Additionally, VAT is set to be standardized to align with EU criteria.

The introduction of incremental flat taxes was a key component of the majority’s tax reform strategy, particularly for revenue coverage purposes. Employees will benefit from preferential taxation on overtime, year-end bonuses, and productivity incentives. Self-employed individuals can anticipate a fairer distribution of tax obligations over time, thanks to the phased introduction of monthly advance and balance payments and the potential reduction of withholding tax.

Tax evasion, estimated at a staggering 75 to 100 billion euros annually, poses a significant challenge. The government plans to address this issue by implementing measures aimed at reducing criminal tax sanctions, particularly those related to false declarations. Future efforts will prioritize strengthening pre-tax audit controls.

Another crucial factor influencing the government’s economic policies is the scarcity of available resources. This is closely tied to ongoing negotiations within EU institutions regarding revisions to the stability pact. Italy has proposed excluding investments and expenses supporting Ukraine in its resistance against Russia’s invasion from debt interest calculations, highlighting the increasing interest burden on its substantial public debt, exceeding 2,800 billion euros.

The government recognizes the urgency of structural pension reforms, given Italy’s low birth rate and the highest average age in Europe at 48. While the majority aims to replace the Fornero law, the limited available funds make immediate action unlikely.

For the upcoming budget law, the government intends to concentrate funds, estimated at 25 to 30 billion euros, on a select few priorities. These include extending the tax wedge reduction for employees, introduced in July of the current year, for an additional 12 months, providing an estimated 100 euros more in workers’ paychecks. Additionally, there are considerations for tax relief on year-end bonuses, with a particular focus on healthcare support and measures to facilitate the resumption of staff turnover. The opposition, however, voices concerns about a potentially challenging budget and calls for increased healthcare funding.

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