Italy ditches 2% VAT hike

Mon 2nd Nov 2015

Italy has dropped its commitment to raise VAT from 22% to 24% in 2016.

The rise was included in the country’s 2014 emergency stability package, and based on the country not hitting Euro currency deficit reduction targets.  The VAT hike clause also included a potential further rise to 26.5% by 2018.  The measure was proposed under pressure from the European Commission which had threatened sanctions against the country if it failed to stay within the 3% deficit to GDP Euro currency requirement.

Italy has one of the highest debt to GDP ratios in the world at 132%, which means it is vulnerable to slow growth and interest rate rises. Growth for 2016 is expected to be a weak 1.1% of GDP following Italy’s most recent recession. This is significantly below the average for the rest of the Euro currency zone.

The VAT increase reversal is included within the government’s 2016 Stability Law which was approved on 15 October. It includes a range of tax and expenditure cuts.  The monetary easing policies of the European Central Bank (ECB), falling oil prices and weaker Euro have enabled this. Italy’s GDP is still almost 10% below its pre-financial crisis levels of 2007.  The credit rating agency, Fitch, was able to confirm Italy’s ‘BBB+’ rating last week in part thanks to the monetary easing and bond buying by the ECB.

Italy raised its VAT rate from 21% to 22% in October 2013 in the midst of the Euro currency crisis.