Italy-fiscal probity, and local pensions

Living in the times when Italy is trying to buck the sustainability trend and wants to cut taxation to help raise belowaverage salaries, particularly in the south of the peninsula

As, we can see in this article the 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 (latest $3076 billion - upwards of 140% of GDP) 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 mainly right-wing government, many wonder how the new prime minister Giorgia Meloni would manoeuvre her way in the execution of a tight budget and plug the pensions hole. The genie came out of the bottle when she announced an ubiquitous 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 resident’s tax regime. Most excitingly, it is expected that the new resident’s tax regime allows for a reduction up to 90% of Italian taxable income for new foreign residents. Can Georgia Meloni square the circle? She somehow found the right balance after several U-turns on introducing a flattax and fighting rampant tax evasion.

The good news is that a flattax 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. Many ask how can such pennies drop from heaven? Will Italy sustain such 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 youth 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. Watch, how way back in 2019, an Italian Budget Law introduced a new favourable regime providing for the application of the individual income tax at 7% flat rate on all non-Italian source income earned by foreign pensioners transferring their tax residence in 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 nine years. This year growth in Italy is projected at around 1.4% — down from a prior estimate of 1.9%. How do we fare in Malta? Pensions sustainability is a significant concern especially as populations age and the ratio of workers to retirees shifts.

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 1.3 which means that the future working-age population may not be large enough to support the current pension system without reforms. The advice by Minister Michael Falzon, is to switch to workers to invest in private pension plans.

The cost of public pensions in Malta is a significant part of government expenditure. As the pension burden grows, it may lead to higher public debt or require increases in taxes, which for the party in power can have adverse economic implications. It is no consolation that Malta has provided temporary work permits for over 100,000 low-skilled workers. These work and pay pension contributions but hardly any of them retire in Malta.

While an influx of such TCN’s can contribute to the pension system, it can also create additional social service demands as medical care in hospitals is under strain. Addressing these challenges Malta not unlike Italy will require to apply a combination of policy measures, including pension reform, measures to boost quality employment, reduce vat, and reform education systems aiming for more tech workers.

In short, a miracle to create a new economic model, perhaps in a non partisan drive to attract multi-national companies to enhance GDP.

“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.”