In Italy Tax cuts are right path to cut debt, Renzi adviser says

At a record 132 percent of gross domestic product, Italy's debt is the highest in the euro zone after Greece's.

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Italy is hoping it will be able to get tax cuts to reduce it's debts. play

Italy is hoping it will be able to get tax cuts to reduce it's debts.

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Italy is confident of getting European Union backing for a programme of sweeping tax cuts because only by boosting economic growth can it hope to lower its huge public debt, the economic adviser to Prime Minister Matteo Renzi said.

Renzi faces tough talks in the next few weeks to convince the European Commission to approve his plan to reduce taxes by 35 billion euros ($39.59 billion) by 2018, instead of using higher tax revenues as the economy grows to accelerate debt reduction.

Yoram Gutgeld, an Israeli mathematician who moved to Italy in 1989, told Reuters the tax cuts were needed to reverse previous austerity measures and generate growth.

"We are now creating a virtuous cycle to unwind a vicious cycle," he said, arguing that Renzi's predecessors had created a "huge recession" by increasing taxation by 50 billion euros since 2011.

At a record 132 percent of gross domestic product, Italy's debt is the highest in the euro zone after Greece's. Gutgeld, who has a key role in policy formation, argued it could only be brought down in a lasting way by fuelling a still fragile economic recovery, and tax cuts were crucial to achieve this.

Renzi has long urged Europe to focus more on growth and less on austerity and he now seems determined to take on the Commission, if necessary.

A government forecasting document to be presented by Sept. 20 will revise up the economic growth outlook, while at the same time raising the targets for the deficit and public debt in 2016 and 2017, sources have told Reuters.

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The so-called "structural" budget deficit, which is adjusted for the business cycle and is closely watched by the Commission, will also be revised up to show no targeted improvement between 2015 and 2016.

Gutgeld defended the strategy and played down the importance of the structural deficit, saying it was a complicated formula which ordinary people didn't understand and that even economists disagreed over how it should be calculated.

Renzi, whose approval ratings have fallen sharply in the last year, plans tax cuts of more than 5 billion euros next year, mainly by abolishing taxation on primary residences, municipal services, agricultural buildings and industrial equipment. He wants to proceed with deeper cuts to corporate tax and income tax in 2017.

He has said next year's budget deficit will remain below the EU's 3 percent of gross domestic product ceiling, but that he should be allowed to raise it by up to 0.6 percentage points from the current target of 1.8 percent of GDP.

He may not get all the leeway he wants, but with the euro zone debt crisis defused by the expansionary policies of the European Central Bank, the Commission is likely to cut him much more slack than previous Italian governments obtained.

Last week Economy Minister Pier Carlo Padoan began negotiations with top Commission officials. These are likely to continue at least until mid-October, when Italy presents its 2016 budget to parliament.

Renzi says he deserves flexibility to reward reforms he has passed in areas such as the banking system and the labour market to try to make the economy more competitive.

Gutgeld said it was natural that observers were sceptical about Italy after "decades of fundamentally bad management and broken promises," but that under Renzi things would be different.

Now a member of parliament, Gutgeld was a director of the management consultancy firm McKinsey until he met Renzi in 2012 and agreed to change career course. "I made a bet that he would change the country," he said.

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