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Matteo Salvini flexes his muscles in call for ‘fiscal shock’ tax cuts

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Matteo Salvini has risked increasing tension between Rome and Brussels by calling for a “fiscal shock” of tax cuts, as he exerts his influence over Italy’s populist coalition after a resounding victory in the European elections.

Italy’s deputy prime minister and leader of the anti-migration League party said that Italy “must lower taxes”.

“We need a Trump cure, an Orban cure, a positive fiscal shock to restart the country,” Mr Salvini said in a radio interview on Tuesday. “Not everything at all at once, but the goal is in the government contract.”

Mr Salvini has been emboldened by his League party coming first in Italy in this weekend’s European elections. As a result, he is planning to push ahead with reducing Italian income taxes to a flat rate of 15 per cent. The measures would cost between €30bn and €50bn, he said, and would in part be funded by cutting other spending.

Mr Salvini’s desire to challenge EU fiscal rules and cut taxes to stimulate a long stagnant Italian economy will be eyed nervously by the incoming European Commission and financial markets. Italy needs to finance a level of public debt that is second only to Greece in the eurozone as a proportion of its overall economy.

Italian financial markets came under pressure on Tuesday as investors anticipated a revival of Rome’s budget battle with Brussels. The FTSE MIB index fell 0.5 per cent, while Italy’s benchmark 10-year bond yield rose for a second day, up 6 basis points to 2.719 per cent.

The premium investors demand to hold Italian debt over German paper widened, as the spread between yields on Italian 10-year government bonds and German Bunds of the same maturity rose to 2.862 percentage points.

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Mr Salvini said he would focus on reducing Italian unemployment by half from 10 per cent to 5 per cent by focusing on “the real economy” and not on the “old parameters” of the European budget deficit rules.

“The music has changed everywhere,” Mr Salvini said in an interview with Italy’s state broadcaster. “In all of Europe, in France, in Finland, in London and Berlin it has changed.”

The Italian deputy prime minister said that Italy’s size and importance to the EU meant his desire to change fiscal policy should be respected by Brussels.

“We are the second industrial nation of Europe, we are a founding member, we have a population of 60 million,” he said. “We pay Europe, we are one of the net contributors, we send €6bn to Brussels in respect to what we get back every year.”

Mr Salvini’s League won 34 per cent of the vote in the European elections, almost doubling its share from last year’s general elections and pushing its coalition partner the Five Star Movement into third place.

The League leader has said he wants to stick with the current government, but that it must push ahead with the policy programme supported by his party, including greater autonomy for Italian regions and the completion of a high-speed rail link between the north of Italy and France.

Italy is already under scrutiny from Brussels over the size of its budget deficit ahead of a meeting of the outgoing European Commission next month, at which it will publish policy recommendations that could chastise Rome.

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The European Commission projects that Rome will post a budget deficit of 2.4 per cent of gross domestic product this year, and 3.5 per cent of GDP next year, meaning the country is at risk of being placed into the bloc’s “excessive deficit procedure”, which includes potential fines for exceeding a notional deficit cap of 3 per cent.

Rome must in theory find more than €20bn in additional revenues next year to avoid breaching deficit limits that it previously agreed with Brussels. Mr Salvini has repeatedly ruled out allowing automatic increases in sales taxes to fund this.

Via Financial Times

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