We are living in a time when Italy is attempting to resist the sustainability trend while seeking to reduce taxes in order to boost below-average salaries, particularly in the southern regions of the Peninsula.
As we can see in this article Prime Minister Meloni is walking a tight rope. She wants to cut personal taxes and introduce a simpler flat tax to generate new business, improve pensions and boost its GDP. One is conscious that Italy suffers from chronic low productivity and fiscal mismanagement.
As a significant member of the Eurozone, Italy borrowed extensively to support its social security system, pensions and chronic deficits. The Italian political scene never ceases to confuse economic observers. With the election of its first predominantly right-wing government, many are curious how Prime Minister Meloni will navigate the challenges of implementing a tight budget and addressing the pension deficit. The situation escalated when she revealed plans for a widespread flat tax regime. This flat tax does not cover any Italian sourced income, as these sources will be taxable at ordinary progressive tax rates yet legal observers state that such a regime, can be a novelty to attract rich expatriates, once used in combination with the new residents’ tax regime.
Most excitingly, it is expected that the new residents’ tax regime allows for a reduction of up to 90% of Italian taxable income for new foreign residents. Can PM Meloni square the circle? She somehow found the right balance after several U-turns on introducing a flat tax and fighting rampant tax evasion. The good news is that a flat tax regime for the self-employed would be extended so that those with gross earnings of up to €100,000 would pay as little as 15%. The right-leaning partners in her coalition also pledged early retirement for some and an increase in minimum pensions and child benefits.
Italy ranked 32 out of 44 countries surveyed in a recent Mercer/CFA Institute global pension index. While it performed quite well on the adequacy of current pensions, it came second-bottom in terms of the sustainability of the system. Against this backdrop, Meloni faces a year-end deadline to present what will be the ninth change to Italy’s pensions since 1992. If she does nothing, a steep hike in the statutory retirement age to 67 will automatically kick in from January under a return to a system introduced in 2012 at the height of a debt crisis, but suspended seven years later. At present, under rules put in place for just one year by Meloni’s predecessor, Mario Draghi, people are granted a state pension at 64 provided they have worked for 38 years.
Many are questioning how such financial benefits can materialise. Can Italy sustain these fiscal reforms? Economists are bullish, saying the morale of living a better life will boost productivity, solidify pensions, cut tax evasion and generate new jobs particularly for youths in the south. The dolce vita will take care of all the worries announced by doubters against such a promiscuous tax reform. In truth, facts are there for all to see. Back in 2019, an Italian Budget Law introduced a new favourable regime, applying a 7% flat rate on all non-Italian source income for foreign pensioners who relocate their tax residence to the southern regions of Italy. Then, as can be expected the flat tax regime was optional. It was available for the year in which the transfer of tax residence occurs and for the following 12 years. How do we compare in Malta?
Pensions’ sustainability is a significant concern especially as populations age and the ratio of workers to retirees shifts. Minister Falzon’s response for pensions was that over the next 20/30 years, Malta, like many other nations, will face several challenges in maintaining a sustainable pension system. We have an aging population, with a growing number of retirees compared to the working-age population. This demographic shift increases the pressure on the pension system as fewer workers support more retirees. This means that pensions need to be paid out over a longer period, increasing the financial burden on the pension system. Add to this the low fertility rate of 1.1, which means that the future working-age population may not be large enough to support the current pension system without reforms. Minister Falzon’s firm recommendation is for workers to invest in private pension plans. Public pensions in Malta represent a substantial portion of government spending. As the pension burden grows, it may lead to higher public debt or increases in taxes, which for the party in power can have adverse economic implications.
Addressing these challenges, Malta, not unlike Italy, will require to apply a combination of policy measures, including pension reform, measures to boost quality employment, revisit VAT rates and reform education systems aiming for more tech workers. In essence, it would take a miracle – like the one Prime Minister Meloni needs to craft a new economic model, potentially focused on attracting multinational companies to boost GDP.