Richard North, 28/04/2004  

Source: Bloomberg

Demonstrating how the EU is increasingly intruding in domestic tax affairs, the European Commission has warned Italy that its attempts at cutting its budget deficit are not sufficient to avoid it breaching the stability pact limits.

Berlusconi had promised income taxes cuts of 6 billion euros but the Commission is calling on Italy to cut spending or raise taxes by 0.5 percent of gross domestic product, or about 7 billion euros, in 2004 and make similar savings in future years.

Italy plans to fight the Commission on this, which again puts Prodi and Berlusconi head-to-head, as they vie for poll position in the forthcoming election.

Nevertheless, while Italy's budget gap is forecast to be 3.2 percent of GDP in 2004 and 4 percent the next year, Finance Minister Giulio Tremonti is claiming that Italy will “respect” the EU deficit limit and still reduce taxes. He may find that the EU has other ideas.

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