In the Bank of Italy’s memorandum it appears that to date no definitive decisions have been made on the classification of the credits that will accrue during 2024, for which Eurostat in its opinion of September 2023 recognized the need for further investigation.
The accounting treatment of building bonuses
Eurostat reiterated that the treatment of the benefit as a “payable” tax credit presupposes that there is a very high probability that it will be fully exploited (not lost): if this hypothesis is not confirmed by the data on the actual uses of the accrued credits, by mid-2024 could reconsider its decisions on the classification retroactively from 2020. Therefore the values of the deficit/GDP ratio could be revised downwards compared to the data calculated by the Government.
Naturally, Bank of Italy takes Eurostat’s new guidelines as valid, according to which if a tax credit circulates, the probability that it will be fully exploited increases and, therefore, must be classified as “payable”. An argument which, in reality, does not exist in ESA2010, for which a tax credit is payable if the State pays, i.e. if there is the right to a cash refund for the part that is not offset.
Apart from this, it is precisely a tax credit that cannot circulate that has a higher probability of being fully exploited: if I have a tax capacity of 50,000 euros why should I take 100,000 euros of tax credits knowing that I can only exploit 50,000? I only take the credits that I can offset and the rest of the work I could do without invoicing. Therefore the discussion on circulation and the relative “non-lossability” is absolutely arbitrary and contradictory and has created great confusion on the classification of tax credits.
The classification of credits and the Stability Pact
The classification of tax credits has important consequences: with the new Stability Pact we can no longer increase the deficit at will. For this reason, it is essential that tax credits are classified as “non-payable”, given that there is no right to a cash refund, with an impact on the state coffers at the time of exercise and not at issue.
During the hearing in the Senate as part of the bill for the conversion of Legislative Decree 29 March 2024 n. 39, the Bank of Italy stated that the incentives may have also provided benefits for works that would have been carried out in any case. A statement disproved by the comparison with other European countries where it can be seen that the output of the construction sector in Italy has a totally different trend which can only be explained with transferable tax deductions for construction.
Changes in construction production between December 2019 and December 2023
(Source: Financial Times)
According to the econometric model of the Bank of Italy, the multiplier associated with the benefit should be around unity, therefore with 100 euros of deductions an increase in GDP equal to 100 euros is obtained. If we consider that the increase in GDP generates greater tax revenues and that Cresme has estimated these revenues to be equal to 34% of the total deductions, we can easily calculate that the net cost for the State is equal to 100 – 34 = 66. The net cost can be considered as an increase in public debt which, if put in relation to the increase in GDP – 66 / 100 – demonstrates that GDP grows more than the debt, pushing the debt / GDP ratio downwards. This is consistent with empirical data that the debt-to-GDP ratio decreased by 18 percentage points from 2020 (155%) to 2023 (137%). All this is not reported in the memory of the Bank of Italy.
The block on construction loans
Certainly, the blocks on the circulation of tax credits introduced by the Draghi Government and maintained by the Meloni Government have made the monetization of tax credits very difficult, causing the financial discount to soar. This is reducing the flow of euros into the economy and therefore the multiplier effect, pushing GDP downwards: construction sites stop, businesses go bankrupt, unemployment increases. This will have very negative effects on public finances unless the government intervenes quickly to facilitate the monetization of tax credits, including by activating public subsidiaries that pay tens of billions of euros in taxes every year.
Bank of Italy highlights other important points. The 110% incentive is too generous and takes away the incentive to negotiate costs between clients and companies. It is not for nothing that already in October 2021 in an article in Milano Finanza entitled “That irresistible lightness of tax deductions” I had hypothesized about lowering the incentive to 70% and then in the book “The Battle of Fiscal Money” I had proposed to differentiate it by income groups/residential areas: in the suburbs where low-income people live the incentive must be higher.
Bank of Italy is concerned about the abnormal growth in tax credit issues. First of all, we must remember that tax credits are generated and deposited in the drawers of clients and companies by the Revenue Agency. Doesn’t AdE have a counter to measure emissions trends in real time? Furthermore, couldn’t an annual cap on tax credit issues have been established? None of this was done by the Draghi and Meloni Governments.
To counter the explosion of tax credit issues, the Bank of Italy agrees with the decision to eliminate the invoice discount mechanism associated with the transfer of credit, not realizing that in this way only those who have the money to advance and the fiscal capacity to take advantage of the deductions will do the building renovation work. The recipes proposed by the Bank of Italy such as the forms of direct subsidy (appropriate for incapable individuals) and support for access to credit (useful for those who only have liquidity constraints) are not practicable and do not solve the problem of the lack of resources for low-income groups: the State has no money and the poorest families cannot get into debt.
To conclude, the problems regarding the classification of tax credits and therefore the estimate of the deficit/GDP ratio in past years remain open; on the estimate of the impact of transferable tax deductions on the growth of GDP and tax revenues; on the correct evaluation of the debt/GDP ratio; on the need to keep the emissions of tax credits in the construction sector under control; on the need to maintain the possibility of transferring these credits. This is the way to allow the less well-off to do the work and the State to finance the economy without advancing euros. The instrument of transferable tax credits can provide great help in this phase of economic stagnation and high interest rates.
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