Publication of Focus Paper no. 1 “The budget package for 2020: an overview of the final text”

 

The Focus Paper “The budget package for 2020: a summary of the final text” (in Italian) analyses the final version of budget package approved by Parliament last December, consisting of the 2020 Budget Act and Decree Law 124/2019 (the “Tax Decree”, ratified with amendments with Law 157/2019 on 19 December 2019) concerning urgent tax measures and measures addressing urgent needs.

 

Overall, the budget increases the general government deficit compared with the unchanged legislation scenario by €16.2 billion in 2020, €12.4 billion in 2021 and €10.3 billion in 2022, equal respectively to 0.9 per cent, 0.7 per cent and 0.5 per cent of gross domestic product (GDP). Compared with the initial version of the measures, the definitive budget confirms the trajectory of the balances as a percentage of GDP, while improving them slightly in absolute value. Compared with the initial bill, the final package provides for a reduction of about €450 million in net revenue and €500 million in net expenditure in 2020, and increases in net revenues of about €1.3 billion and €2 billion in the following two years, associated with increases of about €1 billion and €1.9 billion in net expenditure.

 

The expansionary measures provided for in the budget package amounts to 1.8 per cent of GDP in 2020, 1.9 per cent in 2021 and 1.5 per cent in 2022. Net of the provisions concerning the indirect tax increases mandated in the safeguard clauses, the new measures imply obviously smaller but growing expansionary effects over the three-year period, going from 0.5 per cent of GDP in 2020 to almost triple that in each of the two subsequent years, at 1.4 per cent of GDP. Funding measures amount to 0.9 per cent of GDP in 2020, 1.2 per cent in 2021 and 1 per cent in 2022.

 

While not significantly altering the overall structure of the budget package, the changes introduced in Parliament were numerous. New measures, often with very limited impact, were approved and the financial effects of measures already envisaged in the draft legislation were modified, especially with regard to revenue increases. The main changes concerned the safeguard clauses, public employment, financial relations with local authorities, and the defunding of the national railway network and a number of funds. Changes also affected certain tax items.

 

The reduction in the increase in excise taxes on fuel initially envisaged for 2021-22 (amounting to €350 million and €100 million respectively) was transformed into an increase (€821 million in 2021 and €1,283 million in 2022). Safeguard clause increases remain ‑ mainly relating to VAT – in the amount of €20.1 billion (equal to 1.1 per cent of GDP) in 2021 and €27.1 billion (1.4 per cent of GDP) in 2022.

 

On the public employment front, the measures approved include an increase in the resources for collective bargaining agreements for the 2019-2021 period, an increase in certain funds for ministry personnel and for strengthening firefighting services through both the harmonisation of pay with that for police personnel and an increase in staffing levels. As regards financial relations with local authorities, the municipal solidarity fund was increased (by €100 million in 2020, €200 million in 2021 and €300 million in 2022) and investment grants to municipalities were expanded by €250 million in 2022. Spending cuts for 2020 include reductions in the fund for structural economic policy measures and the fund for long-term capital grants. Other decreases in 2020 include a reduction of €460 million in funds for the railway network, although this was brought forward to 2019 thanks to an amendment of the Tax Decree.

 

On the revenue side, the amendments to the so-called plastic tax (halving its amount, the introduction of exemptions and postponement of entry into force) produced a significant reduction in revenue, especially for 2020. Other measures impacting revenue included the postponement of the entry into force of the new tax on sweetened beverages and the increase in taxation of company cars, with the latter being almost completely eliminated compared with the initial measure. By contrast, additional revenue is expected from an increase in the taxation of gaming. Furthermore, a number of tax incentives (super- and hyper-depreciation) have been transformed into tax credits, improving the deficit in 2020 alone.

 

Finally, the main changes in funding measures include a structural increase of €841 million in net revenue indicated in the second section of the Budget Act deriving from greater personal income tax due mainly from taxpayers for whom the new tax compliance indicators (indici sintetici di affidabilità fiscale – ISA) have been approved. However, as the further revision of forecasts did not reflect legislative changes, it should not have been included as an element of the budget package but should instead have been characterised as a revision of the trend scenario by means of an updated valuation of current legislation measures, separate from the actual amendments. This would have enabled a more appropriate macro-financial analysis in support of Parliament’s decisions.