The Hindu: Published on 30th September 2025.
Why in News?
Italy’s budget deficit is projected to fall below 3% of GDP in 2025, a year ahead of the European Union’s target.
This improvement is attributed to rising tax revenues, supported by job growth, inflation-driven fiscal drag, and reduced tax evasion.
Prime Minister Giorgia Meloni’s government is claiming credit, though economists highlight structural and external factors as more decisive.
Background:
EU rules under the Stability and Growth Pact require member states to keep fiscal deficits under 3% of GDP.
Italy, historically plagued by high deficits and tax evasion, had forecasted a 3.3% deficit in 2025, but revenue growth now suggests a lower gap.
Past reforms since 2011 (digital payments, VAT tracking, e-invoicing) have tightened tax compliance.
Key Factors Behind Tax Windfall:
Job Growth:
About 2 million jobs added in the last four years.
Employment income generates disproportionately high tax receipts.
Inflation-Driven Fiscal Drag:
Wages rose in nominal terms, pushing workers into higher tax brackets, even though real incomes fell.
This effect added an estimated €25 billion (2021–24) to revenues.
Reduced Evasion:
Tax evasion fell from €97 billion in 2017 to €72 billion in 2021.
Tools: e-invoicing, real-time VAT reporting, digital traceability, and stricter audits.
Current Challenges:
Public Dissatisfaction: Despite higher tax collection, real wages are stagnant and below 1990 levels (OECD/ISTAT data).
Policy Contradictions:
Meloni eased anti-evasion measures (raised cash payment limits, offered tax amnesties).
This risks reversing gains in compliance.
High Tax Burden: Tax-to-GDP ratio is 42%, above EU average (40%). Opposition criticizes government’s tax-cut claims.
Global Comparison:
Germany: Adjusts tax brackets annually to offset inflation → prevents fiscal drag.
France: No significant windfall due to modest job and price growth; deficit remains high (5.4% of GDP).
EU Perspective: Italy’s success seen as positive, reflected in Fitch upgrading Italy’s credit rating.
Implications:
Economic: Stronger revenues improve fiscal credibility, attract investors, and help Italy avoid EU sanctions.
Social: Citizens feel squeezed — nominal wages rise but purchasing power declines.
Political: Meloni gains short-term credit, but reliance on fiscal drag rather than real wage growth may fuel public discontent.
Long-Term: Italy must balance tax compliance reforms with genuine tax relief and wage growth to sustain credibility.
Conclusion:
Italy’s fiscal improvement is real but fragile. It owes more to structural reforms, inflation, and employment growth than to immediate government action. While Meloni celebrates the numbers, the challenge remains to sustain growth, improve living standards, and prevent backsliding on tax evasion.
