Extension of the labour tax wedge cut postponed due to lack of funds: lower salaries in Italy from 2025?

Will the Tax Wedge Cut be Extended in 2025?

The question on whether the tax wedge cut will be extended into 2025 is currently a pressing concern for approximately 14 million workers.
Over the past two years, these workers have seen an increase in their salaries thanks to the measure introduced by the Draghi government and later reaffirmed, during the last Budget Law, by the government led by Giorgia Meloni.

In 2024, the cut in the contributory wedge cost the state coffers €10.70 billion, a sum that was covered by resorting to debt in the latest economic maneuver.
Another measure that ended at the end of the year and was also financed in deficit was the cut in Personal Income Tax (IRPEF), which amounted to €615 million.

Minister of Economy Giancarlo Giorgetti has stated that in the upcoming Budget Law, the priority will be to extend the tax wedge cut throughout 2025.
However, with the imminent arrival of a letter from Brussels announcing the opening of an excessive debt procedure – expected to be delivered on June 19 after the European elections -, the government will not be able to resort to deficit again since an agreement will be made with the EU to decrease the debt by €10 billion per year for seven years.

Consequently, starting from 2025, there is a concrete risk that the salaries of millions of workers will decrease again.
While the government may have good intentions, the lack of funds is a significant hindrance, as also declared by Giorgetti in a recent outburst reported by Corriere della Sera.

In May 2023, Giorgia Meloni stated her readiness to make the tax wedge cut permanent.
However, in November, she already lowered expectations, stating, “It would be nice to make the tax wedge cut permanent, but it becomes difficult in this specific context when we still do not know the rules we will operate under in the coming years.”

The issue of the tax wedge and salaries has not been touched upon during this election campaign by Premier Meloni.
Once the polls close, Italy will wake up to discover not only a lack of funds but also the need to implement drastic cuts in public spending amounting to €70 billion over the next seven years.

Further Analysis by the Bank of Italy

In its latest report, the Bank of Italy explained that “for 2024, the contributory rate paid by employed workers has been reduced by 7 percentage points for annual salaries equal to or less than €25,000, and by 6 points for those between €25,000 and €35,000, as was done in the second half of 2023.”

In essence, thanks to the extension of the tax wedge cut, 14 million workers in 2024 will benefit from higher salaries, with an increase ranging from approximately €60 to €100 more per month for each worker.

In a scenario where salaries have been stagnant for years and eroded by inflation, not extending the tax wedge cut into 2025 would be a real blow to those families who have seen their disposable income increase by 1% – as per Bank of Italy data – thanks to this measure during the current year.

Future Financing Challenges

An unanswered question for months is how the government intends to finance an extension that will cost almost €11 billion.
As mentioned, resorting to deficit again is unlikely unless a frontal clash with Brussels is sought.

There have been talks of a €5 billion cut in tax breaks to be included in the next maneuver, funds that would be used to cut the wedge.
Even if this were the case, an additional €6 billion would still be missing.

There is a sense that in Italy, there will be a stark contrast before and after the European elections: until 11:00 pm on June 9, our country will be portrayed as in perfect health, only to suddenly face a sort of “Troika” at home, so much so that Giancarlo Giorgetti is already being described as having his bags ready for a move to Brussels as a European Commissioner.