Italy considers 2016 VAT increase as finances worsen

Fri 17th Oct 2014

Latest Italian budget briefing notes reveal that the government is considering a new VAT rise. Italy raised its VAT rate to 22% in October 2013.  Italy had already raised it 1% in 2011 from 20% at the height of the Euro currency crisis.

As the country’s economy continues to stagnate, and actually slipped back into recession at the last quarterly GDP results, the government deficit is continuing to drift away from the 3% of GDP target – a key rule for continuing membership of the Euro currency.  The potential VAT rise suggested by the Italian Treasury would help ensure a balanced budget by 2017 and reassure Euro currency partners and markets.  A rise of 2% to 24% would raise around Euro 15billion and ensure a removal of the country’s structural deficit.

Part of Italy’s problems are sharing a currency with strong economies such as Germany. Prior to joining the Euro, Italy regularly used Lira currency devaluations as a tool to maintain the competitiveness of its goods overseas. This mechanism is now lost.

Instead, it is looking at raising Italian VAT as an internal currency devaluation tool, helping to fund cuts in corporation tax and employer labour taxes.