WEST UNIVERSITY OF TIMISOARA

FACULTY OF ECONOMICS
AND BUSINESS ADMINISTRATION
SPECIALIZATION: FINANCE & BANKING (English Line)

The Budgetary System in Italy

Student:
Andreea Alexandra BANCU
Series: 9, Group: 1

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Contents
1.

Introduction: What is the budget system? ........................................................................................... 1

2.

A global perspective .............................................................................................................................. 1

3.

The budget of Italy in 2012: highlights and expectations ..................................................................... 1

4.

The budget consolidation in Italy.......................................................................................................... 3

4.1.

The tax revenue side ..................................................................................................................... 3

4.2.

The expenditure side .................................................................................................................... 3

5.

Budget punctuations and budgetary regimes in Italy ........................................................................... 3

6.

IMF report on Budget Reform in Italy ................................................................................................... 6

7.

Reforms in Italy ..................................................................................................................................... 7

7.1.

Reforms for growth: more competition ....................................................................................... 7

7.2.

Reforms for growth: better administration and justice................................................................ 7

7.3.

Reforms for growth: reduced cost of PA and politics ................................................................... 7

7.4.

Reforms: more dynamic and inclusive labor market .................................................................... 8

8.

Further reading ..................................................................................................................................... 8

9.

Bibliography .......................................................................................................................................... 9

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1. Introduction: What is the budget system?

The budgetary system is the aggregate of budgets of the state and administrativeterritorial units and the budgets and accounts of institutions and funds that are autonomous in a
budgetary sense. These budgets are based on economic relationships and legal norms.
The nature of the budget system is determined by the socioeconomic and political
system of the country, and its organizational structure depends on the form of the administrative
and state arrangement.

2. A global perspective
Italy is in need of economic reform, despite of its industrial economy with roughly the
same total per capita output as France and United Kingdom. Italy is divided into two halves: the
northern part of the country, which is developed from an economic perspective and driven by
private companies, and the southern part, which is less developed and has an agriculturally based
economy, is more welfare dependent and has a higher unemployment rate. There is a lack of raw
materials and energy sources, and because of this, more than 75% of the energy supply are
imported. One of the economic hurdles for the Italian government is the debt-to-revenue ratio.
The official debt is above 100% of GDP, and the government found it difficult to lower the
budget deficit in order to improve the ratio.
Italys economy recognized an increase by less than the euro zone average, and this
growth was expected to decelerate from 1.9% in 2006 and 2007 to less than 1.5% in 2008, as the
euro zone economy continues to decrease (Economy Watch, 2009).

3. The budget of Italy in 2012: highlights and expectations

Highlights of Italy Budget 2012:
The budget will look to free up the labor markets;
The regular rate of value added taxes (VAT) has been lifted to 21% from 20%;
A solidarity tax of 3% has been levied on all tax payers who earn in excess of 300,000
euro. This rate will remain effective till December 2013. The national government holds the right
to extend this period till it is able to balance out the budget.
Income tax rates have been fixed at 20 percent and will be effective from 1st January
2012. However, interest generated from government bonds would be exempted.
The rate of corporate income tax that is paid by energy companies operating in Italy will
go up by 4 percent in the coming three years;
Italy budget 2012 confirms previously adopted pension reforms;
State properties and other assets will be marketed in 2012 in an attempt to generate
revenues. The Economy Ministry will help to set up special purpose economic programs for
purchasing them. Private investors will be allowed to buy shares in these assets. The government
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is aiming at selling 20 percent of the barracks and prisons by April 2012. In future farms and
related properties will be sold. The money generated from this sale would be used to reduce
debts.
Public administration would be made simpler;
Companies that have a maximum of 9 employees and employ younger professionals on
an additional basis will not be required to pay social security for the extra workers. This benefit,
though, will be applicable only for the first three years the additional workers are operating in a
particular company.
Excise duties on diesel and petrol will be increased marginally from 1st January 2012
onwards;
A yearly tax could be levied on the net wealth of every taxpayer along with increased rate
of VAT. These features will help in generating the funds that could be used to reduce the high
taxes that are presently being paid by companies and families.
No tax incentives have been provided to apprentice workers;
A package of 45 billion euro has been set aside for addressing budget related issues in
2013 fiscal;
Government expenses are going to be reduced and steps will be taken to serve the
interests of Italys creditors;
The age for retirement will be increased to 67 by 2026;
Rules that restrict transfers of employees in the public sector would now be relaxed. It
will impose restrictions, though, on companies that already have too many employees;
Tax cuts will be provided to companies investing in infrastructural development
preference will be given to the highway sector;
The planned construction site of Turin-Lyon railway and tunnel has been mentioned as
nationally strategic areas;
Lawyers, architects, notaries and other professionals will not be required to pay tariffs.
This will help them settle their own remunerations with their respective clients;
New rules will come in place with regards to employment opportunities available at the
Pompeii Architectural Park. Now people from around the country will be able to apply for the
jobs previously these opportunities were available only to candidates in and around Naples.
Expectations from Italy Budget 2012:
As per financial experts the newest budget that focuses heavily on reductions meets the
expectations of the European Commission, but the measures approved in the budget may not be
helpful for the long term growth of Italian economy.
One of the main challenges for the new government of Italy will be to introduce measures
that can contribute meaningfully towards national economic growth. According to economic
analysts, the tax burdens will have to be shifted, according to economic analysts, for overall
growth.
The European Commission has reportedly asked the government to relax the taxes
applicable to business houses and their employees so as to help the economy get back on its feet
they have further suggested that property and consumption taxes can be upped to relax the

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rates.
Experts feel that, unlike Greece, Italy can manage its budgetary deficit but there are still
critical issues like inadequate job creation and overall economic growth.

4. The budget consolidation in Italy

4.1.

The tax revenue side

The increase in tax pressure has been a crucial component in the process of fiscal
adjustment undertaken in Italy. By looking at this experience, the path followed by Italian policy
makers does not appear to have always been straight. To understand the evolution of tax revenue
in Italy and its role in fiscal consolidation, two aspects are important:
The distinction between structural (permanent) and
The transitory (extraordinary) tax changes, the allocation of tax revenue among different
levels of government.

4.2.

The expenditure side

Reducing the expenditure side of the budget is much more difficult then raising taxes. In
Italy, once the gain deriving from the reduction of the cost of debt was cashed, the control of the
expenditure has been much more troublesome. Capital expenditure has been the first scapegoat,
with a reduction of 1,5 points of GDP from 1993, while the degree of reduction of primary
current expenses was of a not significant size. The best that could be reached was the
stabilization of its 1995 ratio to GDP. This effect is the result of rising social expenditures,
driven by demography and the impossibility to find social consensus on a stronger reform of the
pension system.

5. Budget punctuations and budgetary regimes in Italy

In 2011 Italy has celebrated the 150s anniversary of its foundation as an unitary state.
After about sixty years of democratic development and increasing consolidation of the rule of
law, the interruption of the democratic experience due to the establishment of a Fascist
dictatorship deprived the country of the most essential liberties for more than 20 years. After
that, the Italian political system went back to the democratic rule with the elections of a
constituent assembly (1946) and after two years, with the establishment of a parliamentary
democracy. Since then, a difficult political, economic and social equilibrium and a particularly
fragmented and polarized party system made of this country a peculiar case of difficult
democracy (Allum 1973; Spotts and Wieser 1986; Lapalombara 1987). However, the political
system lived more than 40 years of stability, since the beginning of the 90, when the crisis of the
so called first republic (1992-1996) marked an important turning point.

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Economists have explained the difficult situation of the Italian budgetary politics since
the times of the foundation of the unitary political system: the necessity to pay the cost of a
permanent warfare against the Austrian empire and the structural divide between the vivid (but
territorially limited) industrial economy of the North and the performances of the backward
society in the Southern area (Banfield 1958; Putnam 1993) are the most important factors
determining the persistence of a huge public debt and structural deficits in the management of
the public resources.
In the course of the first half of the XX century, the experience of Fascism and two
terrible wars determined other deep and uncontrolled expenditures, and a phase of structural
deficits was then characterizing the years after the oil crisis of the early seventies. The Italian
political system has been considered as one of the most illustrious victims of the fiscal crisis of
the state, since it could never be able to overcome its huge debt: its entrance in the EMU area
was indeed possible only because of a positive trend in the reduction of the budget deficit,
although the overall amount of the public debt has been continuously noticeably higher than
100% of the annual GDP. As we can observe in the next figure, only during the couple of
decades corresponding to the "economic boom" (1950-1970) the Italian public debt was under
control.
Figure 1: Public debt in Italy

Is interesting to explain the magnitude of budget changes in times of "normal budgeting"

or "expected incrementalism". The republican period offers the opportunity to explore such kind
of situations: as the next figure shows, the budget changes after 1945 have been under control, at
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least in comparison to the figures of the first half of the XX century (Figure 2). We can clearly
identify relevant changes and some years of nervous adaptation in the pattern of overall public
expenditure.
Figure 2: Italian state spending per year in constant Euros and % change (1862-2009)

This analysis will be therefore conducted starting with the re-birth of democratization in
Italy and with the beginning of republican age, 1948. This will allow us to consider the whole
period of the interventist state (in 1980, public expenditures reached the significant threshold of
40% of the GDP, in line with the aggregate values of a number of European welfare-oriented
democracies), during which a wide set of redistributive policies and state participations were
introduced, expanding the size of the public budget (see Figure 3).

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Figure 3: Evolution of public spending by function (1946-2009) in millions of Euro

(constant prices)

6. IMF report on Budget Reform in Italy

At the request of the Minister of Economy and Finance of Italy, a team from the Fiscal
Affairs Department of the International Monetary Fund visited Rome during March 21-April 3,
2007, to advise on reforms of the budget system aimed at improving the quality and efficiency of
public spending. The team met with a number of institutions involved in the budget process, and
its report Italy: Budget System Reforms was published by the Italian authorities on June 15, 2007
on their website.
Based on best-practice from international experience, the IMF report makes a number of
recommendations for further enhancing the budget reform process, including:
developing a sound program-based budget classification and related cost-accounting;
making spending reviews an integral part of the budget system;
enhancing the role of the Council of Ministers in setting budget priorities;
more transparently reflecting existing and new spending priorities in budget documents;
reducing the number of micro-amendments to the budget during its approval process;
increasing focus on results and the medium-term rather than inputs and the short-term.

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7. Reforms in Italy
7.1.
a.
b.
c.
d.

Professional services: abolition of minimum fees, easier access to professions with reduction
of compulsory traineeship, increase in the number of pharmacies and notaries;
Network industries: gradual delinking of gas prices from the oil market and unbundling of
the gas network;
Local economic services to submit to regular open, transparent tenders;
Other measures include ban on multiple board membership, for instance: financial services;
freeing up of shop opening hours; lessening of link between petrol stations and oil
companies.

7.2.
e.
f.
g.
h.
i.
j.

Reforms for growth: more competition

Reforms for growth: better administration and justice

Digitalization of the administration to cut burden on firms and consumers

Set up of limited liability company for under 35s made simpler and cheaper
Purchase of goods and services go through central-agencies; reduced payment delays by the
PA and between firms;
Unprecedented powers to fight tax evasion (ban of cash payments above 1,000;
Redditometro to compare declared revenues and lifestyle);
Higher penalties and public office ban to fight corruption if convicted
Speedier justice (maximum of six years to complete judicial process); special court for
business disputes; Chapter 11 type of bankruptcy procedure.

7.3.
k.

Reforms for growth: reduced cost of PA and politics

Number of civil servants to decrease by 10% (20% at managerial level); salary cap on top
level management;
l. Reduced financing for regions and for regional politicians; increased requirements for
pensions; better controls;
m. Reduction in number of Provinces from 86 to 51 by the 1st January 2014;
n. Proposed Constitutional change to bring within central government control of big transport
networks, energy transmission and distribution and external trade;
o. Stronger powers by Court of Auditors to inspect regions finances and ensure they respect
national and EU budgetary stability rules.

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7.4.
p.
q.
r.
s.
t.

Reforms: more dynamic and inclusive labor market

Less fragmentation will increase productivity and competitiveness;

More flexibility on the firing side will facilitate more efficient allocation of workers among
sectors;
Overall employment protection legislation is getting less strict than in Germany;
Unit labor costs: the draft budget sets aside 1.6 billion in incentives to increase
productivity (de-taxing of wage increases linked to productivity);
Overall the OECD estimates that the reforms adopted in the last year will raise the countrys
GDP by up to 4 % over the next 10 years.

8. Further reading
For further reading and another interesting lecture, I recommend the following links:
http://ec.europa.eu/budget/biblio/documents/2012/2012_en.cfm , a site with a lot of
documents;
http://www.nytimes.com/2012/05/02/business/global/monti-selects-areas-to-cut-toreduce-italys-budget.html, a site with comments about the measures of Monti Government;
http://www.governo.it/GovernoInforma/eng/reports/allegati/Italy_budgetary_consolidatio
n_reforms.pdf, a site with some recent studies and graphs;
Mario Monti, (December 10, 2011). Accessed at
http://www.economist.com/node/21541460 on January 11, 2013.

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9. Bibliography

Franco Reviglio(2000). IMF Working Paper - Fiscal Affairs Department, Budgetary

Transparency for Public Expenditure Control: The Case of Italy Prepared by Franco
Reviglio* Authorized for distribution by Vito Tanzi.

Italian Government (November 2011 September 2012).Italy s Strategy for Fiscal

Consolidation and Growth.

Mario Monti (16 November 2012). Italys budgetary consolidation and reforms.

Paolo Bosi1 and Paolo Onofri. The Budget Consolidation in Italy: Is There any Lesson for
Japan?

Federico Russo (University of Siena), Luca Verzichelli (University of Siena), (June 14-16,
2012). Budget punctuations and budgetary regimes in Italy, Paper to be presented at the 5th
Annual Conference of the Comparative Agendas Project (CAP), Sciences-Po Campus,
France.

Italian Chamber of Deputies (28-29 April 2011). OECD Parliamentary Budget Officials
Third Annual Meeting Stockholm - Recent Budget Reforms In Italy, Adjusting the
budgetary decision-making system to the new European Economic Governance System.

Schuetze, C. (25 November 2012). Accessed at

http://www.nytimes.com/2012/11/26/world/europe/europes-budget-crisis-hitsuniversities.html?pagewanted=all&_r=1&, on January 10, 2013.

Pianigiani G., (2012, 1st of May). Accessed at

http://www.nytimes.com/2012/05/02/business/global/monti-selects-areas-to-cut-to-reduceitalys-budget.html, on January 9, 2013.

Charles E. Menifield, Department of Public and Non-Profit Administration, University of

Memphis,(2011), Comparative Public Budgeting: A Global Perspective.

IMF,(June 15, 2007). Acessed at http://www.imf.org/external/np/sec/pr/2007/pr07129.htm,

on January 10, 2013.

Finance mapsofworld. Accessed at http://finance.mapsofworld.com/budget/italy/ on January

10, 2013.

Janusz Lewandowsky, (September 20, 2012). Accessed on

http://ec.europa.eu/budget/news/article_en.cfm?id=201209201011, January 10, 2013.

Aleksandrov, A. M. and Lavrov, V. V. Accessed on

http://encyclopedia2.thefreedictionary.com/Budget+System at January 10, 2013.

Documents.(2012). Accessed on
http://ec.europa.eu/budget/biblio/documents/2012/2012_en.cfm on January 12, 2013.

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