From hidden provisions (NEC and fiscal drag) to the exit tax. The manoeuvre involving hidden taxes

Every government’s dream is to draw up a Budget Bill that funds new expenditure without raising taxes. The Meloni government has succeeded in this feat on several occasions, drawing on an extraordinary source of funding: the PNRR funds. Through successive revisions of the Plan, it has reallocated measures and funding, freeing up national resources to be channelled towards other priorities. This year, the PNRR is no longer sufficient, but the government has found another solution: the flexibility granted by the EU for defence and energy security expenditure.

The European safeguard clause (NEC) allows for an increase in certain expenditure without breaching the agreed limits on public spending growth. The overall margin stands at 14.4 billion for 2027. However, the budget tables show that new expenditure on energy and defence amounts to 9.145 billion. Added to this are approximately 3.4 billion in measures already provided for under current legislation, which are now being brought under the European safeguard clause. In particular, the Draft Budgetary Plan (DPB) reveals that the government has invoked the safeguard clause for 2.1 billion in defence expenditure under current legislation for 2027; consequently, by difference, the clause applies to 1.3 billion relating to energy expenditure. This €3.4 billion was already provided for in the budget and can now be used to cover increases in expenditure or decreases in revenue that have nothing to do with energy or defence. This is likely the result of the letter sent to the Commission, which agreed to allow previously decided measures to be included, thereby creating fiscal space for other purposes.

We are thus witnessing a minor accounting miracle. If an expenditure that was already planned is brought under the exemption, this frees up funds to finance other measures. There is no need to cancel the previous expenditure, nor to find new revenue. All that is required is to change the way it is accounted for in relation to European constraints. The result is that flexibility originally designed to fund energy security and defence indirectly allows other things to be funded. First the NRRP, now European flexibility. And next? If one wishes to fund new expenditure on a permanent basis, sooner or later one must either cut other expenditure or permanently increase revenue. In reality, Giorgia Meloni has not needed to openly raise taxes because, in recent years, taxes have risen of their own accord. This was driven by inflation through fiscal drag. When nominal incomes rise to keep pace with price increases but income tax brackets and allowances are not adjusted, the state collects more tax even though taxpayers’ purchasing power does not increase. It is a silent tax. During the years of inflation, fiscal drag generated tens of billions in additional revenue, which was subsequently returned to taxpayers through tax reforms. And it will continue to do so even in 2027.

This brings us to the fundamental issue. It is not merely important to know how a budget is financed. We need to understand what is being financed with these new resources. And here, the Budget Act presents a paradoxical picture. Instead of concentrating resources on a few measures capable of boosting growth, there is a proliferation of specific measures, concessions and benefits aimed at identifiable groups. The flat-rate scheme is being extended to cover up to 100,000 euros in revenue, widening the tax gap between the self-employed and employees. Personal income tax (IRPEF) is being reduced by extending the 33 per cent rate up to 55,000 euros, with the benefits concentrated on incomes above 50,000 euros. Bonuses, selective tax reliefs and incentives are being added, each with its own target audience. Of course, not all of these measures are pointless. But taken together, they paint a picture of a budget that distributes resources rather than setting priorities.

The paradox is that a collection of minor measures is being funded by the higher taxes paid quietly by Italians and by a European framework that was supposed to serve strategic objectives. The question should be simple: which of these measures will boost productivity in the coming years?

Amidst all this chaos, there is ultimately a political irony. Among the new tax measures is the so-called ‘exit tax’, which taxes certain capital gains realised by wealthy taxpayers when they transfer their tax residence abroad. The expected revenue is modest, but the political significance of the measure is far greater. The exit tax is, in fact, one of the tools that could lend credibility to a future wealth tax. If the aim is to tax wealth, it is also necessary to prevent the wealthiest taxpayers from evading the levy simply by moving abroad. A paradoxical outcome.