Cut taxes to boost economy, says Bank of Italy

Country missed decades of technological developments

Cut taxes to boost economy, says Bank of Italy

Rome, May 31 - Government must act quickly to reduce business and labour taxes to create employment and stimulate the economy, Bank of Italy Governor Ignazio Visco said Friday. Immediate action is essential because high taxes are "holding back employment and business activity," Visco told the central bank's annual meeting in Rome. The cuts may take effect over the medium-term, and taxes that affect productivity should be first on the chopping block, he added. The governor's speech came at the same time the national statistics agency Istat reported that unemployment in recession-hit Italy reached 12.8% in the first quarter of 2013, the highest since the first quarter of 1977. One reason for the troubled economy and sluggish productivity is the fact that over the past 25 years, Italy has failed to take part in enormous marketplace changes and must now act fast to catch up, Visco said. "We were not able to respond to the extraordinary geopolitical shifts in technology and demographics of the last 25 years," he added. That is now taking an enormous toll on the Italian economy and government policy reform is essential to catch-up and stimulate an economic recovery. The Italian government has one advantage, the governor noted. Italy's exit from the European Commission's excessive deficit process is the "first fruit" to grow from the former government's efforts at fiscal consolidation and should not be squandered, Visco said. "The exit from excessive deficit procedure is the first fruit...It should be considered an investment on which to build". Former premier Mario Monti's government introduced strict budget measures that led to an EC decision this week to close the procedure. That is expected to free up about eight billion euros for the current government in the 2014 budget. Meanwhile, interest cuts by the European Central Bank have been effective and the ECB stands ready to cut again if necessary, Visco said. Cutting rates to increase liquidity in the eurozone, "has proven effective," he said. But more may be needed, he added. "The ECB is examining, in concert with other European institutions, initiatives to promote issues of securities backed by loans to businesses". Visco also called for measures to "break the negative spiral" in credit availability in the economy, the result of a drop in the amount of lending by nervous banks to businesses. At the same time, companies are increasingly afraid to borrow, leading to economic stagnation.

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