While Italian Premier Enrico Letta has expressed satisfaction at the likely closure of the European Union’s (EU) excessive-deficit procedure against Italy, the European Commission (EC) has warned that the fiscal consolidation should continue and has made recommendations on future tax measures that run contrary to the Government’s current proposals.

The EC noted that the Italian Government had been requested to reduce the country’s fiscal deficit from the 5.5 percent of gross domestic product (GDP) seen in 2009 to the 3 percent required under EU regulations by last year. In fact, the fiscal deficit was exactly on target in 2012, and is forecast by the EC to reduce again marginally to 2.9 percent this year and to 2.5 percent in 2014.

The EC has also looked at the measures announced by the new Government on May 17 and, in particular, at the Government’s suspension of the interim payment of IMU, the local property tax, on first residences that was due on June 16.

It has decided, given that the present Government has confirmed that it will maintain the previous Government’s budgetary constraints, that the IMU payment will be due on September 16 if overall property tax reform is not agreed by the Government by end-August, and that the effect of that reform is expected to be revenue-neutral, Italy’s improved fiscal position is likely to last.

However, while Italian Premier Enrico Letta paid tribute to the policies adopted by previous Governments, particularly that led by Mario Monti, for the EC’s decision and said that all of Italy should be proud of its achievement, he will have also heard the comments of EC President José Manuel Barroso, who pointed to the country’s very high public debt level as a reason to continue fiscal consolidation, and the Monetary and Financial Affairs Commissioner Olli Rehn, who remarked that the current plan to repay tax refunds and credits to businesses would take away much of the Government’s room for manoeuver.

While the Government is aware that the closure of the EU procedure for excessive deficit will only have an effect on Italy’s budget in 2014, it wants to avoid a 1 percent increase in the normal rate value added tax due in July this year, and is also being pressurized by Silvio Berlusconi’s center-right People of Freedom party, which is a member of Letta’s broad governing coalition, to scrap the IMU property tax on first residencies entirely, and even return the tax levied in 2012.

On the other hand, the EC’s country specific recommendations, made at the same time as the excessive-deficit review, are contrary to both of the current Government concerns. The EC strongly suggests that a shifting of the tax burden towards, and not away from, consumption and property will be essential, in order to reduce the very high fiscal burden on employers and employees in a revenue-neutral way and to foster economic growth and competitiveness.