Italy's financial bill to hurt consumption

ROME - The financial bill announced by the technocratic cabinet led by Prime Minister Mario Monti will impact negatively on domestic consumption, local analysts said on Wednesday.

According to Carlo Maria Pinardi, a corporate finance professor at Milan's Bocconi University, by cutting income tax in the two lowest bands next year while raising value-added tax (VAT) by 1 percent, the emergency government risks to "score an own goal" in the recession-hit country.

"Being VAT the most evaded tax, raising it means further weighing on legal economy while leaving its illegal part unpunished," Pinardi told Xinhua.

"I think this latest step was wrong, exactly like a previous tax on luxury goods," he said noting that the wealthy or dishonest remained untouched by moving their assets abroad, while fundamental industries of Italy like the nautical one were brought to their kneels.

"It will be the same result with the VAT hike, that will further weigh on citizens who already pay taxes thus deep their competitive disadvantage," he said.

In his view, Monti's cabinet has sought the easiest solution to balance the budget in 2013 as promised, instead of "courageously" cutting huge public expenses.

Giuliano Noci, a marketing professor at Politecnico University of Milan, agreed that Monti's move will trigger "recessive effects" on the Italian economy, mainly for two reasons.

"First, the VAT raising will penalize domestic consumption, which is already weak, with higher consumer prices," he told Xinhua. Secondly, the professor said the cut in income tax will not lead to more consumption either.

"In the current uncertain context, people do not spend money. Therefore what seems to be a compensation for the VAT hike is not like this," Noci said.

Once again, he added, it will be consumers and small and medium-sized companies to suffer the most in a country with some three millions of people without a job, and whose purchasing power has recorded the lowest level since 2000.

According to Noci, the emergency government has adopted a "merely accounting vision" in order to put Italy on track to balance its budget in structural terms next year.

But what the professor defined as Monti's "austerity integralism" will have the only effect to delay problems while not helping the country release the much needed new energies, he noted.

"It is like forcing a wounded athlete to run a 100-meter game. Would it make sense or is it better to wait a little while curing him?" Noci said.

At the same way, Italy needs "credible programs" to reduce its public debt (over 123 percent of gross domestic product) which demand more structural reforms, he said.

Giacomo Vaciago, an economics professor at Milan's Catholic University, was more optimistic. "When German Chancellor Angela Merkel took office, first of all she raised VAT by 3 percentage points, and sustained industrial investment," he told Xinhua.

At the same way, Italy can stimulate competitiveness by increasing indirect taxes and cutting direct ones, Vaciago said. In his view, the government's last move goes in the right direction despite "being only a starting point".

"However, domestic consumption will unavoidably suffer," he added.