November 14, 2017 / 2:34 PM / in 9 days

Italy's election pits populists against populists

ROME (Reuters) - One candidate for prime minister in Italy’s election next year says he’ll slash taxes by 50 billion euros (44.86 billion pounds) and hike the budget deficit to pay for it. Another wants to bring back the lira Italy used until 2002 - and then there are the populists.

5-Star movement founder Beppe Grillo speaks during the final rally for the regional election in Palermo, Italy, November 3, 2017. REUTERS/Guglielmo Mangiapane

To most people, that label belongs to the anti-establishment 5-Star Movement, which leads opinion polls ahead of the vote due to be held by May. But looking at the main parties’ economic plans it is hard to judge who deserves it most.

The economy is growing at its fastest clip since 2010 but politicians of all stripes say they will use the extra resources to cut taxes and spend more, rather than pay down the biggest debt burden in the euro zone after Greece‘s.

Italy was at the heart of the euro zone debt crisis in 2011 and the election is seen the next source of potential instability in the currency bloc, especially if parties carry out the maverick policies they are proposing.

The vow to chop up to 50 billion euros ($60 billion) off income and corporate taxes and renege on Italy’s commitment to balance its budget comes from the leader of the ruling Democratic Party (PD), former Prime Minister Matteo Renzi.

He wants to hike the deficit from a targeted 2.1 percent of gross domestic product this year to 3 percent and then hold it at that level, and said this month he would “bang his fists on the table” in Brussels to get his way.

The plan to print a “new lira” for domestic use while keeping the euro for international trade comes from centre-right leader and four-times prime minister Silvio Berlusconi, who says the scheme will boost consumer spending and economic growth.

None of the main parties is campaigning on an economically orthodox platform of fiscal consolidation likely to please financial markets or the European Commission.

Populism is thriving in Italy mainly because fiscal rigour prescribed by the EU is widely blamed for a deep double dip recession between 2008 and 2013 from which the country is only gradually recovering.

A survey commissioned by the European Parliament last month showed only 39 percent of Italians felt their country had benefitted from EU membership, putting it bottom among the bloc’s 28 nations.

Policies considered responsible by Europe’s political and economic mainstream are seen as vote-losers in Italy, where 5-Star has often set the political agenda in recent years.

“IRRESPONSIBLE PROMISES”

Luca Ricolfi, a sociology professor at Turin University and prominent political commentator, said the election is likely to produce a hung parliament and this meant politicians felt free to make promises they would probably never have to honour.

“As there are no reasonable parties at this election, Renzi can make irresponsible promises to try to win votes because the centre-right and 5-Star are even more irresponsible,” he said.

Berlusconi himself has often been called populist since he entered politics in 1994 promising “lower taxes for everyone,” but now both he and Renzi are casting themselves as moderate leaders whose role is to halt the maverick 5-Star.

The 81-year-old media tycoon’s main coalition partner is Matteo Salvini, head of the anti-immigrant Northern League and an ally of French National Front leader Marine Le Pen and Geert Wilders of the right-wing Freedom Party in the Netherlands.

The League has its own scheme for a parallel currency, which it calls mini-BOTs, named after Italy’s short-term Treasury bills, which it sees as a probable stepping-stone to exiting the euro.

As well as a parallel currency, Salvini wants to introduce a single tax rate of 15 percent for individuals and companies instead of the current five staggered income tax brackets of between 23 and 43 percent.

The party’s economic spokesman Claudio Borghi told Reuters the “flat tax” would reduce revenues by 40 billion euros (about 2.5 percent of GDP) but this would soon be offset by a reduction in tax evasion and a boost to growth.

He said the League planned to introduce this radical tax plan in its first budget, to obtain a “surprise effect”, and it was no problem if it pushed up the budget deficit and raised objections in Brussels.

“We have no intention of respecting current deficit targets,” he said. “We couldn’t care less about the opinions of others because we pay in to Europe more than we get back, so why should others have a say on our spending or our deficit?”

HUNG PARLIAMENT SEEN

5-Star has about 28 percent of the vote, according to opinion polls, followed by the PD on 25 percent and the centre-right allies the Northern League and Berlusconi’s Forza Italia (Go Italy!), each with around 15 percent.

Under the largely proportional electoral system, no party or coalition is expected to win a majority of seats in parliament.

Berlusconi also promises a “flat tax,” but he wants to set it at 23 percent instead of the League’s 15 percent, and to phase it in more gradually.

In addition, he has promised to raise minimum pensions to 1,000 euros per month from around 500 euros, abolish road tax on most cars and introduce a “dignity income” - a new welfare benefit to help the 15 million poorest Italians.

The dignity income was a response to 5-Star’s flagship policy the “citizens’ wage,” which would top up the income of 9 million poor Italians to 780 euros per month, just over half the average wage, at an annual cost of 17 billion euros.

5-Star has rowed back on a previous pledge to hold a referendum on Italy’s euro membership, but its 31-year-old leader, Luigi Di Maio, still wants to renegotiate the EU’s fiscal rules and raise the budget deficit.

“We have to increase public investments to help growth and the only way to do that is to increase the deficit above 3 percent of GDP,” he told Reuters.

($1 = 0.8534 euros)

Reporting by Gavin Jones; Editing by Giles Elgood

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