Prime Minister Giorgia Meloni’s administration is turning to Italy’s banks and insurers to help finance €3.5 billion ($3.8 billion) of the country’s budget, as the government seeks to fulfill costly electoral promises without imposing new taxes on citizens. The funding will mainly come from postponing tax deductions for banks, a move that analysts believe will not significantly impact lenders’ profitability.
Budget Aims to Address Voter Promises
Meloni announced that the funds will be used to support healthcare and aid the most vulnerable sectors of society, sticking to the government’s commitment not to introduce additional taxes for individuals. While the details regarding the collection and allocation of the funds remain unspecified, Finance Minister Giancarlo Giorgetti is scheduled to clarify the measures in a forthcoming press conference.
Measures to Ensure EU Compliance
The government’s budget plan, valued at €30 billion ($33 billion) for 2025, was agreed upon just before the deadline for submission to the European Union for review. The goal is to reconcile a push to accelerate deficit reduction with political demands for tax relief and increased social spending, including defense, healthcare, and support for low-income households and small businesses.
Postponing Tax Deductions for Financial Sector
The budget’s financial-sector measures will delay the deductibility of deferred tax assets (DTAs) related to past credit losses, IFRS9, and goodwill for the next two years. Recovery will then be phased in starting in 2027. According to analysts, the impact on banks’ capital will be minimal, and profitability is expected to remain unaffected.
A Pragmatic Approach to the Banking Sector
The move reflects a return to previous government attempts to address perceived windfall gains in the banking sector, especially amid high interest rates. Recent efforts to impose an unexpected tax on bank profits were abandoned after triggering a market selloff, leading to this more nuanced approach. The Italian Banking Association has been working with officials to mitigate any negative effects.
Challenges and Fiscal Reassurance
Facing heightened scrutiny from the European Union due to Italy’s large deficits, Giorgetti has pledged to bring fiscal shortfalls below the EU’s 3% target by 2026. Italy’s borrowing costs have remained stable, with the yield spread between Italian and German bonds reaching its lowest level since March, indicating that markets are reassured by the government’s efforts to manage its finances.
Conclusion
The Italian government is navigating the challenge of maintaining fiscal discipline while delivering on election promises. By tapping banks and insurers, the budget aims to fulfill social and economic commitments without resorting to broad-based tax increases. However, the success of this strategy will depend on how well the government manages both domestic expectations and European fiscal requirements.
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