Italy’s cabinet is scheduled to convene on Tuesday evening to finalize the 2025 budget, a crucial step for Prime Minister Giorgia Meloni’s government, which is grappling with internal divisions over the proposed tax increase on banks. The plan aims to generate additional revenue to fund a series of economic stimulus measures, including tax cuts for middle- and low-income earners.
Budget Deficit to Rise and Spending Curbs in Focus
In an effort to finance these measures, the government has decided to increase the deficit to 3.3% of GDP in 2025, up from an estimated 2.9% for this year. This will involve borrowing an additional 9 billion euros. The remaining budgetary gap is expected to be filled through a mix of spending reductions and tax hikes in other sectors.
The cabinet is set to meet at 8 p.m. on Tuesday to approve these measures, with much of the discussion likely to center on the controversial bank tax proposal.
Bank Tax Debate Intensifies
The Treasury has been negotiating with Italy’s banks, which have posted substantial profits in recent years, to find ways they could contribute to the nation’s fiscal consolidation. Government officials have hinted at the possibility of introducing a bank levy, a concept that has raised concerns in the banking sector and contributed to volatility in bank shares.
Economy Minister Giancarlo Giorgetti, a member of the far-right League party, has suggested that “sacrifices” are necessary from those who can afford them, stating that a contribution from banks “shouldn’t be considered blasphemy.” However, this proposal has been met with resistance from other coalition partners, particularly Foreign Minister Antonio Tajani’s Forza Italia party, which has voiced opposition to any form of tax hikes.
Previous Bank Tax Controversy
Italy’s relationship with bank taxation has been rocky in recent years. Last year, the government introduced a 40% tax on banks’ windfall profits, only to later scale back the measure, limiting its scope and providing banks with an opt-out clause. Ultimately, this policy raised no significant revenue for the state, leading to frustration within the government.
Additional Revenue Measures Under Consideration
In addition to the bank levy, officials are exploring other revenue-generating measures, including reforms to stock option taxation for corporate managers and changes to the taxation of banks’ deferred tax assets (tax credits stemming from past losses). The government is also considering raising excise duties on diesel and eliminating some tax exemptions for companies related to corporate tax (IRES).
Italy’s Fiscal Challenges and EU Scrutiny
Italy’s budget deficit remains a point of contention with the European Union, as the country remains under EU surveillance due to its deficit of 7.2% of GDP last year—well above the EU’s 3% limit. This marks the highest deficit-to-GDP ratio in the euro zone. To avoid further EU sanctions, Italy has committed to reducing the deficit to 2.8% by 2026, which will hopefully allow the country to exit the EU’s “excessive deficit procedure” in the coming years.
However, despite efforts to cut the deficit, Italy’s debt, already the second-highest in the euro zone, is expected to rise gradually. By 2026, Italy’s debt-to-GDP ratio is projected to reach 137.8%, up from 134.8% last year.
Reforms and EU Approval for Budget Adjustment
The European Union’s newly revamped fiscal rules require member states to reduce both deficits and debts steadily over a period of four to seven years. In order to secure EU approval for a more gradual seven-year adjustment to its budget, Italy has pledged to undertake key reforms, including improving the efficiency of its tax system.
As part of these reforms, Giorgetti has proposed updating the estimated values of houses, which are often outdated and lead to unwarranted tax breaks. Like the bank tax, this proposal has sparked criticism from coalition partners, further complicating the government’s efforts to pass the budget.
(INCLUDES INPUTS FROM ONLINE SOURCES)
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