Italy's VAT to rise, tax on low incomes down

(MILAN) - Sales tax in Italy is set to rise by one point but tax on low incomes will drop, under a draft bill to reduce debt and protect the poor in the recession-hit country.

The so-called "Stability Law", adopted by the cabinet late on Tuesday after an eight-hour long debate, lays out budgetary measures for 2013 to 2015.

The government, which had previously said it wanted a two-point rise in VAT sales tax from mid-2013, finally settled on a one-point rise to a maximum of 22 percent.

The bill also aims to give breathing space to people on lower incomes, who have been hit hard by severe austerity measures aimed at tackling the country's vast debt of 1.9 trillion euros ($2.4 trillion) and staving off the debt crisis.

The government said it intended "to introduce an important element of equity by revising income tax and helping families on the lowest incomes to consume."

The bill also aims to create new incentives to increase productivity as well as providing safety nets for those who risk finding themselves in financial hot water because of changes to the retirement age and pension reforms.

The government is also carrying out a spending review intended to weed out waste in the public sector, with 3.5 billion euros worth of cuts planned, particularly in the public administration and health budgets.

Funds are also expected to flow into the government's coffers thanks to a financial transactions tax to be adopted soon by 11 European countries.

Prime Minister Mario Monti, who took over the reigns in November last year when the debt crisis threatened to envelop Italy, has been accused by critics of overdoing austerity packages and cuts while neglecting to boost growth.

Italy's court of auditors warned last week that the country risks "short-circuiting between rigour and growth" and said taxes should be lowered.

Monti defended himself on Wednesday, insisting that austerity "is not a vicious circle, budget discipline pays and... has meant we have not had to keep playing catch up."

The tax reduction "delivers a clear signal that we can allow ourselves a bit of relief" because the economy has begun to show signs of stabilising, he said.

But the rise in VAT, although lower than feared, sparked resentment among hard-up Italians and trade unions.

And the plan to shave one billion euros off the health sector budget is being bitterly fought by Health Minister Renato Balduzzi, who has called on the government to ease up on cuts to health care services and personnel.

Fabio Sdogati, economics professor at Milan's polytechnic institute, said that while the drop in low income tax is "a real signal, though its impact may be limited," the VTA rise will have a "disastrous" effect on consumers.

He said Monti has plunged Italy into a "ferocious recession," adding that he would be better advised to tax patrimony than incomes or consumers.