End-of-service allowance proves sticking point in 2007 budget talks

In October 2006, discussions were underway in parliament regarding the 2007 budget, which was due to be approved before the end of 2006. The economic measures envisaged in next year’s budget law include structural measures worth about €33.4 billion, in addition to important new provisions relating to labour and social security.

By the end of 2006, the Italian parliament was set to approve the 2007 finance act (legge finanziaria), presented to and approved by the cabinet in September 2006 (IT0607029I).

The economic policies and political commitments, which are set to be transposed into legislation by the 2007 finance act, include structural measures worth €33.4 billion, mainly aimed at promoting growth, employment, economic development, equity and social justice (€18.6 billion) and at reducing Italy’s deficit (€14.8 billion). The overriding objective of the 2007 budget law is to reduce the budget deficit–gross domestic product (GDP) ratio to below 3% in 2007.

Proposed measures of plan

The government’s economic plan will affect the four main pillars of public expenditure: public administration, healthcare system, social security system and local bodies. More specifically, it will include the following provisions:

  • measures aimed at stabilising employment relationships, in particular at encouraging the transformation of atypical work into the standard form of subordinated employment;
  • measures aimed at reducing the level of undeclared work, including the introduction of mechanisms aimed at guaranteeing the fulfilment of social security obligations in all sectors, increasing the amount of administrative sanctions in the event of infringement of labour regulations, and social legislation. Employers would also be obliged to communicate the start of an employment relationship to the competent authorities a day in advance;
  • stabilisation of non-managerial employment relationships in the public sector;
  • income support measures;
  • social security measures, such as transferring workers’ end-of-service allowance (trattamento di fine rapporto, TFR) into an ad hoc fund created by the National Social Security Institute (Istituto Nazionale Previdenza Sociale, INPS);
  • new contributory rates and new social protection provisions for semi-subordinated or economically dependent workers (IT0501NU01);
  • tax wedge cuts aimed at increasing the incentives for female employment, particularly in southern Italy;
  • new income tax rates, along with new deductions and provisions for families.

Trade union demands

In September 2006, Italy’s three main trade union confederations – the General Confederation of Italian Workers (Confederazione Generale Italiana del Lavoro, Cgil), the Italian Confederation of Workers’ Trade Unions (Confederazione Italiana Sindacati Lavoratori, Cisl) and the Union of Italian Workers (Unione Italiana del Lavoro, Uil) – drafted a joint statement asking the government to include more resources for development in the 2007 budget. The statement also requested that more attention be given to equity and income policy, along with increased measures to combat tax evasion, incentives for the Mezzogiorno areas in the south of Italy, new social security policies aimed at combating poverty and social exclusion, measures in favour of families, and a revised welfare policy.

According to the trade union confederations: ‘if there is no equity of resources between those allocated for reducing public expenditure and those allocated for development, the 2007 budget law is unsustainable.’ Tax equity, the trade union confederations insisted, should be at the centre of each action of economic and tax policy.

Dissent over TFR

The main reason for the dissent between government and the social partners concerned the use of workers’ end-of-service allowance (TFR). The government has introduced some changes in relation to the mechanism underlying workers’ choice in this respect, originally established by the former centre-right government (IT0512101N). Accordingly, workers are free to decide whether to invest part of their severance pay into a closed fund or to leave it with the company. Under the previous system, workers had six months to decide what to do, after which, on the basis of the ‘tacit consent principle’, the TFR of workers who did not make a choice was paid into a supplementary fund.

However, the new centre-left government, in office since May 2006, decided to make a change in this respect, deciding – on the basis of the ‘tacit consent principle’ – to automatically transfer 50% of workers’ TFR into a special ad hoc fund for infrastructure managed by the INPS. The trade unions have strongly opposed this measure, asserting that the ‘government cannot pass over the social partners on a matter concerning a part of income legally owned by workers’.

Compromise reached

On 20 October 2006, after a series of negotiations, the social partners and the government reached agreement on two controversial key issues.

Firstly, the supplementary pension reform will be put in place from 1 January 2007, which is earlier than the former government had planned. Workers will have six months to decide what to do – in other words until June 2007. Secondly, in the case of tacit consent, TFR will be paid into the supplementary pension fund rather than the INPS fund, as was initially proposed by the current government. The TFR of workers who decide to leave it with the company will remain with the organisation if it employs fewer than 50 workers, which in Italy represents about 3.7 million companies; if the company employs more than 50 workers (23,000 companies), it will be paid into the INPS fund. Moreover, the government has committed itself to revising the tax-related aspects of the supplementary fund, in order to align them with those of other European countries.

Reactions of social partners

The social partners expressed their satisfaction with the agreement, as was reflected in the comments of Raffaele Bonanni, Secretary General of Cisl, and Maurizio Beretta, General Director of Italy’s main employer association, the General Confederation of Italian Industry (Confederazione Generale dell’Industria Italiana, Confindustria).

In contrast, the former Minister of Economy, Giulio Tremonti, held a different view, fearing that the threshold set by the agreement could encourage many employers to limit the size of their workforce to 50 employees.

However, according to Romano Prodi, Italy’s Prime Minister and former president of the European Commission, the agreement ‘marks another step in the process of concertation and dialogue, towards a budget law which is in keeping with the times and with the requirements of a country that needs to be re-launched’.

Marta Santi, Cesos

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