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In October 2002, the Italian cabinet approved the 2003 budget law, which includes measures such as tax cuts, reductions in public administration expenditure and a range of one-off revenue-generating measures. The social partners reacted in different ways to the budget. Employers were harshly critical, while the trade unions were divided in their views.
On 1 October 2002, the Italian cabinet approved the 2003 state budget law. Cuts in public administration expenditure and new sources of revenue are seen as necessary due to the current negative economic trend, which has proved to be worse than government forecasts. Tensions arose within the centre-right government over the identification of the sectors where expenditure is to be cut and of those where new resources are be allocated.
The 2003 budget law provides for cuts in public administration expenditure and new receipts, together worth a total of EUR 20 billion. Of this, EUR 12 billion will come from one-off receipts: EUR 8 billion will come from a tax amnesty and EUR 4 billion will come from the evaluation and sale ('cartolarizzazione') of state-owned real estate. The remaining EUR 8 billion will come from cuts in current public administration expenditure.
The public debt is estimated at 2.1% of GDP in 2002 and is forecast to decrease to 1.5% in 2003. Some EUR 12 billion of the additional funds arising from the budget law will be allocated for the reduction of public debt. The government forecasts GDP growth of 0.6% in 2002 and of 2.3% in 2003.
The government's main budget measures of relevance to employment are summarised below.
The government intends to fulfil the tax commitments made in the national tripartite 'Pact for Italy' (Patto per l'Italia) on the labour market, the tax system and the South of Italy, signed in July 2002 (IT0207104F).
Some EUR 7.5 billion will be used for tax reductions: EUR 5.5 billion for the reduction of personal income tax (Imposta sul reddito delle persone fisiche, Irpef) in favour of medium- and low-income families; and EUR 2 billion for a reduction by 2 percentage points in corporate income tax (Imposta sul reddito delle persone giuridiche, Irpeg) which will fall from 36% to 34%, and a cut in the regional tax on productive activities (Imposta regionale sulle attività produttive, Irap).
The 2003 budget law introduces the first measures in the reform of the Irpef tax, as promised during the 2001 electoral campaign. When the reform is completed in 2006, there will be only two personal income tax rates. In 2003, Irpef will not be paid by: retired people receiving the minimum pension; dependent workers and retired people with an annual income lower than EUR 7,500; and self-employed workers earning less than EUR 4,500. Besides these exceptions, five Irpef rates will remain in 2003, as at present, but tax bands will be modified, as follows:
To increase government revenue, the 2003 budget law provides for a tax amnesty which seeks to address the problems for the tax system caused by past irregular payments by people and companies. Tax-payers who benefit from the tax amnesty will have to pay EUR 150 if the value of the tax owed is lower than EUR 2,000 and 10% of the value of the tax owed if it amounts to between EUR 2,000 and EUR 20,000. Payments will have to be made before 28 February 2003.
A deadline for the 'regularisation' of money illegally kept abroad has been postponed. It will now be possible to regularise such funds between 1 January 2003 and 30 June 2003, paying tax at a rate of 4%, instead of the present 2.5%.
The 2003 budget law provides for a reduction of 10% in the funds allocated for the purchase of goods and services by the public sector, along with a recruitment freeze and new personnel mobility measures.
In the schools sector, there will be a 5% reduction in the number of caretakers. Mobility to other parts of the public administrations is foreseen for 5,300 teachers and similar staff currently not employed in teaching activities. All teachers will be obliged to teach for at least 18 hours per week. Furthermore the 2003 budget law allocates an additional EUR 300 million for universities and research.
The number of hospital bed spaces will be reduced. The final objective is to have an average of five beds per 1,000 citizens. This measure will lead to the closure of many small hospitals. Thermal cures, which have so far been free, will now cost EUR 70 each. Each citizen will have to have a healthcare card, on which medical, pharmaceutical and specialist prescriptions will be recorded.
The 2003 budget law provides for a 2% reduction in transfers to local authorities. The additional Irpef revenues paid to municipalities and provinces will remain the same as in 2002. Starting from 2004, state transfers to local bodies will stop and local bodies will have to contribute to tax revenue. In 2004, municipalities current 'co-participation' in the Irpef tax will be increased in 2004 by 2 percentage points (from 4.5% to 6.5%) and provinces will have to start to co-participate in Irpef revenue, with 1%.
The 'national stability pact' (similar to the EU pact) which binds the expenditures of municipalities and provinces has been strengthened. Municipalities and provinces will not be allowed to exceed, in 2002, 3.6% of the 2001 budget deficit.
The system of incentives to support companies has been profoundly changed, especially as regards investment in the South of Italy, which previously qualified for 'no strings attached' funding. From now on, companies which benefit from state incentives for production and investment in the South will be obliged to pay back at least 50% of the funds, at a rate of interest no lower than 0.5%.
Citizens aged over 58 and with more than 37 years in employment will be now entitled to receive both a pension and income from work, something which was previously prohibited.
As provided for by the Pact for Italy, the 2003 budget law has allocated EUR 700 million for the reform of the 'social shock absorbers' (ammortizzatori sociali, the system of measures which cushion the effects of redundancies and restructuring - IT9802319F), and increased by EUR 780 million the allocation for funding public sector collective agreement renewals, starting from 2003.
The 2003 budget law sets up a single fund for southern Italian areas (the Mezzogiorno). The fund unifies all the existing economic tools used to support the Mezzogiorno regions, and will be directly managed by the Prime Minister. All the allocations provided for depressed areas thanks to additional public funds - EUR 400 million in 2003 and EUR 7 billion in 2005 - will be gathered in this fund.
The budget law sets aside EUR 1 billion (of which EUR 354.3 million will be allocated for 2003) for the creation of a fund for public works and infrastructure (Fondo rotativo per opere pubbliche, Frop) which will financially support such works.
Many of the social partners have been very critical of the budget law. Mistakes in government forecasts, the worrying economic situation (with rising inflation and low economic growth) and the reduction of economic support for companies had already led Confindustria, the main employers' confederation, to be very critical of the government's economic policy (IT0209205F). Confindustria now takes a negative view of the new cuts in funding for companies and believes that the budget 'does not contain a development policy'. According to the employers' confederation, the budget is a missed opportunity, because the government has limited itself to taking a series of one-off measures without addressing the structural problems of the Italian economy, such as the reform of the pensions and healthcare systems. According to Antonio D’Amato, the Confindustria president, the government has issued Italy's worst ever budget law.
The three main trade union confederations – the General Confederation of Italian Workers (Confederazione Generale Italiana del Lavoro, Cgil), the Italian Confederation of Workers’ Unions (Confederazione Italiana Sindacati lavoratori, Cisl) and the Union of Italian Workers (Unione Italiana del Lavoro) - have expressed different opinions on the budget law. Cgil is critical, with Guglielmo Epifani, its general secretary, stating that the 2003 budget law 'is not a rigorous law, because accounts are approximate and cuts are addressed to essential services such as the schools and healthcare sectors'. Cisl and Uil, by contrast, take a positive view of the budget and of the government’s decision to respect the Pact for Italy and not to reduce social expenditure and pensions, even if both confederations are very critical of the measures relating to the Mezzogiorno.
The governor of the Bank of Italy (Banca d’Italia), Antonio Fazio, also voiced many criticisms of the budget. According to Mr Fazio, the measures taken by the government are not enough to balance public accounts and to relaunch investment. Mr Fazio hopes for a serious review of the budget law, which he believes provides for too many one-off measures to increase state revenue, while the tax amnesty risks 'reducing the credibility of the public administration'. According to Mr Fazio, the government's policy should be integrated with structural actions aimed at balancing the public accounts in a definitive way and guaranteeing development: the first and most urgent action is the reform of the pension system.
The national Board of Auditors (Corte dei Conti) has also been very critical of the budget law. Francesco Staderini, the president of the Board, said during a parliamentary hearing that tax revenue forecasts resulting from tax amnesties have been overestimated, and that it will be hard to reduce the public deficit to EUR 20 billion by 2003 when the overall needs of the public administrations will probably amount to EUR 50 billion. This gap could probably be resolved thanks to privatisations, said Mr Staderini ,who believes that reform of the social security system is necessary.
The 2003 budget law issued by the Berlusconi government is a brilliant example of 'creative finance', according to many international observers.
The government has drawn up its budget in a context of binding political and economic constraints. On the political level, the government, which had repeatedly promised during the 2001 electoral campaign a drastic reduction in family and company taxation and a 'new economic miracle' capable of ensuring GDP growth of over 3% per year, was obliged to ignore the signals of an economic slowdown and the analyses of the most respected international research centres. This optimism about the possibilities of economic recovery was essential to convince the social partners to sign the Pact for Italy in July 2002 and to reduce the pressure from the EU for Italy to respect the parameters of the Economic and Monetary Union (EMU) Stability and Growth Pact.
The tripartite Pact for Italy and the EMU Stability and Growth Pact placed further constraints on the government in drawing up the budget. The government, in order to obtain the support of Cisl and Uil for the Pact for Italy, agreed not to reduce social expenditure. At the same time, given the explicit opposition of the trade union organisations and of the Lega political party - a key part of the government coalition - the government stated that there were no conditions to intervene in the pension system.
The room for government intervention was thus largely restricted to one-off interventions such as the tax amnesty, the cuts in regional and municipal transfers, the reduction in incentives to companies and the 50% reimbursement of funds in favour of investment in the South. Furthermore, the populist side of the government was seen in its decision to reduce taxes on families more than on companies. The government thus failed to meet the expectations of some of its main electoral supporters, such as businesses in both the North and South.
The government's budget decisions will have drawbacks on both the social and political levels. On the social front, the budget penalises the Mezzogiorno, and criticisms of this approach unite trade unions and employers' organisations. On the political level, Confindustria's opposition to the budget is reflected among some of the more centrist elements in the government, who are distancing themselves from the actions of the Minister of the Economy, Giulio Tremonti, who is the behind the government's economic policy.
The government has been obliged to reopen negotiations with the social partners with regard to its policy towards the South, and these negotiations may represent the occasion to recover lost consensus. The situation could also encourage greater convergence among the trade unions, which have expressed the same opinions about the government's Mezzogiorno measures. Union unity is currently strained, not least because of the unilateral general strike held by Cgil on 18 October 2002, following a decision taken several months ago by Cgil in a political phase very different from the current one (IT0210101N). This strike was also harshly criticised by the centre-left political parties. Cgil's decision to depart from unity of action with the other two main trade union organisations has also resulted in the presentation of separate bargaining platforms for the renewal of the main sectoral collective agreements.
The prevailing divisions among the trade unions have two main effects. First, Cisl and Uil have an increasing influence on the government, which cannot renounce, in a situation of growing social conflict, the privileged channel it has established with these two union confederations. Second, the unions cannot act as a reference point for the political opposition, which is divided in its views over the trade unions' positions, and in particular over Cgil's unilateral strike.
All these factors may allow the government, which has a strong parliamentary majority, to ride out a difficult economic and social situation while waiting for the economic recovery which should take place during the second half of 2003. The moment of truth may come in spring 2003 when, according to many observers, a drastic reduction in public expenditure will be necessary. On that occasion, the government will no longer have room for 'creative finance' but will have to take unpopular measures such as a reform of the pension system (Domenico Paparella and Vilma Rinolfi, Cesos)