Italy readies 2020 budget that cuts taxes, cracks down on evaders

Italy's government will approve a draft 2020 budget on Tuesday that cuts taxes for middle-earners and cracks down on tax evaders, while holding the deficit at the same level as this year, government officials said.

After signing off the draft budget at a late-evening cabinet meeting the anti-establishment 5-Star Movement and centre-left coalition partners the Democratic Party will send it to Brussels for scrutiny by the European Commission. The budget scraps a hefty increase in sales tax worth 23 billion euros ($25.35 billion) which had been scheduled to take effect in January, but which the coalition feared would push Italy's already-stagnant economy into recession.

However, since setting the economic targets that provide the framework for the budget in September, the ruling parties have struggled to agree over many of the measures to adopt. The budget cuts income tax for those earning between 26,000 and 35,000 euros per year, in the form of a rebate of around 500 euros which will cost state coffers some 3 billion euros in 2020, rising to 5.5 billion in 2021, government sources said.

The financial bill targets the 2020 deficit to remain at 2.2% of gross domestic product for a third consecutive year. Deputy Economy Minister Laura Castelli, from the 5-Star Movement, said in a statement that the lengthy negotiations with the PD had yielded "an expansionary budget" that will cut income tax and increase benefits for poor families and the disabled.

To help finance these measures, the government has put together a raft of measures to curb rampant tax evasion which costs the state some 109 billion euros every year, according to Treasury estimates. The budget must be presented to parliament by Oct. 20 and approved in both houses by the end of this year.

It remains to be seen whether it will be rubber-stamped by the European Commission. The package targets the structural deficit -- which strips out the effects of economic growth fluctuations -- to rise by 0.1% of GDP next year, reversing a commitment made in July to reduce it by 0.6 points.

The anti-tax-evasion plan, targeted to raise an ambitious 7 billion euros, aims to encourage the use of easily traced credit cards rather than opaque cash transactions. The draft, obtained by Reuters, introduces sanctions of up to 2,000 euros for retailers and service providers that do not accept credit cards. It lowers to 1,000 euros from 3,000 the threshold above which it is illegal to make cash transactions.

In addition, the government plans to set a lower rate of value-added tax for purchases made by card rather than cash. To encourage people to ask retailers for receipts, the budget also launches lotteries in which holders of the winning receipts, identified with a number, get a tax-free cash prize.

These "receipt lotteries" have already been adopted in several countries including Portugal, Slovakia and Malta. A new "web-tax" on digital companies aims to raise around 600 million euros each year, the draft showed.

The levy, applied on companies with annual global revenues worth at least 750 million euros and digital services exceeding 5.5 million euros in Italy, obliges them to pay a 3% levy on internet transactions conducted in Italy.

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