The Italian finance ministry has quietly watered down its controversial windfall tax on banks’ “extra profits” following an intense round of discussions between rival political factions and the nation’s banks.
According to the draft of a new amendment that will dramatically modify the tax before it goes to the Italian parliament for approval, banks will be able to cut their liability significantly in two new ways.
The development is a big concession to the country’s banking lobby and its political ally, the Forza Italia party that is a junior partner in the current coalition government. It’s also a concession to the European Central Bank, which sharply criticized the original draft earlier this month.
It also appears to thwart Prime Minister Giorgia Meloni’s hopes to narrow the country’s budget deficit with an opportunistic raid on a sector of the economy that — at least temporarily — is cash-rich.
The banks will now be able to take one of two options: under one, they can escape the tax entirely if they allocate at least 2.5 times the amount that would have originally been paid under the original tax to their core capital reserves. Banks that make a loss can use the previous year’s profits for the reserves, but they are prohibited from passing any increased costs on to consumers.
Under the second option, banks may pay a modified version of the tax capped at 0.26 percent of risk-weighted assets, instead of 0.1 percent of total assets as previously foreseen. That also excludes profits generated by interest paid on government bonds, effectively creating a new incentive for Italian banks to hold such debt.
Rome maintains the tax will raise between €2.5 billion and €2.7 billion, just under the €3 billion predicted before. Unicredit analyst Francesco Maria Di Bella told POLITICO the change will likely have little impact on Meloni’s budget planning.
“Even in its original formulation, the support from this bank tax was only marginal,” said Di Bella. “Of course, it will generate new revenues for the Treasury, but I don’t think the Government has regarded it as a game changer for next year’s deficit.”
However, a game changer is increasingly what Meloni appears to need: A Reuters report on Friday suggested that this year’s budget deficit will be as wide as 5.5 percent of GDP, rather than the 4.5 percent projected. The government is also likely to project a deficit for next year wider than the 3.7 percent of GDP currently foreseen, Reuters reported. It is due to present its 2024 budget draft and economic forecasts later this week.
“The banks have won,” said one Italian banking executive, granted anonymity to speak on a sensitive matter. “The entire law is changed. The banks will have to make a political choice: If they want to oblige the government, they’ll pay the tax; if they want to escape it, they’ll increase their capital. In this case, [the Treasury’s] income will be zero!”
Climbdown or clarification?
The exemption of Italian debt holdings, in particular, had been explicitly requested by the Italian Banking Association (ABI), and echoed by Forza Italia’s Antonio Tajani, one of two deputy prime ministers in Meloni’s Cabinet.
The finance ministry, however, told POLITICO that it “changes nothing,” and that the tax never included profits from bond holdings in the first place, which are already taxed at a fixed 12.5 percent. One official argued that the coalition rivals and the ABI were simply “fear-mongering” when calling for bonds to be excluded. That claim in turn raised eyebrows with bank executives still in negotiations with the government over the drafting of the bill.
Outside observers are likewise skeptical of the government’s line.
“Let us just say it wasn’t entirely clear, or why would everyone ask for it,” said Francesco Galietti, a former treasury adviser and founder of the risk consultancy Policy Sonar. “The wording of the bill is a bit slippery.”
The government’s initial announcement on August 7 was light on details, making it easy to backtrack. When that prompted market turmoil, the government was similarly quick to “clarify” that only 0.1 percent of a given bank’s assets would be affected — even though no the original announcement contained no such detail.
Whatever the motivation, the government’s tax plan is now fully aligned with the pro-bank, Forza Italia wing of the coalition — and it can say, in a way that’s hard to disprove, that that was the plan all along.
