He's won. Italian Prime Minister Silvio Berlusconi has succeeded in cutting taxes. In Italy. The captain of his nation's ship, who had gripped the helm and vowed to hurl his entire balking government over the side if they refused to stand with him, took a tremendous risk. But last night, the storm ebbed and Berlusconi sailed to victory. Tax cuts, $8.6 billion, are coming at last to high—tax Italy, a country whose previous governments had driven 25% of its economy underground, and much more underwater, with Italy's crushing 43% of GNP tax burden.
This portends well for tax—cutting in the rest of Europe, where even moribund socialist governments there are starting to get the picture.
The worst is over, but a few risks remain. Berlusconi has bet it all on the unwavering belief that tax cuts bring economic growth. One risk is if the tax cuts don't bring enough economic growth to expand the tax base, Berlusconi's leftist enemies will be after him, denouncing him as fiscally irresponsible for 'allowing' Italians to keep more of their own money. The other risk is one of degree. My savvy Italian friend wonders if the tax cut was soon enough to be felt in the economy in time for elections. If the tax cuts bring economic growth and expand the tax base, Berlusconi's coalition will be assured of an electoral victory in regional elections in the Spring of 2005, and parliamentary elections a year later.
Can it happen? Well, history is instructive. President George W. Bush's 2002 tax cuts, also said to be too little and too late, were enough to bring him over the top last Nov. 2. The economic growth happened in time for him. And it's hard to think this this escaped Berlusconi's notice as he relentlessly held on against all odds for lower taxes.
Perception is important because businesses make decisions to expand or not based on how they think the political picture will evolve. When markets and companies are confident a pro—growth leader is winning or will win, growth has a way of massing momentum. Economic growth began emerging in the U.S. shortly after the 2002 Bush tax cuts, but the stock market remained choppy. However, after Bush won the first debate with Democratic candidate John Kerry, the U.S. stock market's technical charts showed that they mysteriously began loading up for a bull market.
That's why Berlusconi's tax cuts are so important now. They may be too late to show enough growth in time for 2005's regional elections, but there is significant hope they will in time for parliamentary elections in 2006. The effects of tax cuts should convince the growth drivers in the private sector that Berlusconi is steering the ship of state in a welcome new direction, the risk has been taken, he's going to keep winning, and with the risk for business reduced, it's time to start growing.
Perceptions of coming victory affect the attitudes of politicians, too. My Italian friend says it's certainly so for Italy's politicos, putting it this way:
Of course, if his allies smell defeat, they become more treacherous. If they smell victory... they start thinking of pork...
And Berlusconi? He thinks it's too much worry. The man who studies history is as confident as a gleaming yacht on the Mediterranean right now. He's won the big one. And as the rest of Europe looks on and begins tax—cutting of its own, he's now getting ready to win more.