ROME (Reuters) – Last year, Italy’s construction industry was brought back to life by creative incentives for people to make their homes more environmentally friendly. This helped the country’s economy grow and was praised around the world. After a few months, it looks like it will end in tears.
The complex system of tradeable tax credits, which gave a big boost to the sector, has come to a halt because the government is cracking down on fraud. This means that builders aren’t getting paid for work they’ve already done.
They and a business lobby group are warning that tens of thousands of bankruptcies and layoffs could push Italy’s weak economy into recession.
Companies that haven’t been paid for about seven months have stopped paying their suppliers and consultants, which has caused a domino effect involving thousands of companies and workers.
Norbert Toth, whose building company in the central coastal town of Formia has laid off 20 of the 30 workers it had six months ago, says, “We are headed for a disaster, not just for the construction industry but for the whole economy.”
There are already signs of the crisis in official data.
In April, construction output fell for the first time in nine months. In May, confidence in the building sector was at its lowest level in six months, and the construction purchasing managers’ index was at its lowest level since January 2021.
Some of the 200 billion euros ($210 billion) in pandemic recovery funds that Rome is supposed to get from Brussels could also be at risk. One thing Italy has to do to get the money is almost double the energy efficiency of its buildings by 2025. Without the incentives, this could be hard to do.
LIQUIDITY CRISIS
The much-talked-about plans for 2020 have turned into an Italian tale of creativity, fraud, and red tape.
Toth, who is 39 years old, is one of the people who started a group called National Construction Class Action. In this group, hundreds of small building companies like his own share information and talk to politicians to try to keep the incentives going.
Some of the companies are desperate for cash and are offering to sell tax credits worth tens of thousands of euros at huge discounts of up to 50 percent.
Under the most generous plan, called the “superbonus,” the state paid an eye-popping 110% of the cost of making buildings more energy–efficient. This included adding insulation, installing solar panels, and replacing old boilers and window fittings.
It let homeowners deduct the cost of building work from their taxes over a five-year period or give the tax credit to the builder as payment.
The builder could then sell it at a discount to another company or bank, which could then sell it to another company or bank, just like any other financial instrument that makes the system more liquid.
STRIVE TO GROW
Even though there was a lot of paperwork and the rules were changed often, the plan seemed to be a huge success.
The long-stagnant construction industry in Italy added 0.9% to Italy’s 6.6% economic growth last year.
In November, the Construction Sector Observatory of the European Commission called the superbonus “a very successful measure” and suggested that it be used on a wider range of buildings.
Other European countries, like Germany, Spain, and France, also helped pay for green home improvements, but not as much as Italy did.
Then, at the end of last year, tax police said they suspected fraud worth more than 2 billion euros was connected to green building incentives, which included the superbonus to a small extent.
That made policymakers worried, and Prime Minister Mario Draghi started harshly criticising the measure, which had been put in place by the previous government and was kept in place by Draghi.
Last month, he told the European Parliament, “We don’t agree with the superbonus.” This was a rare case of a government criticising one of its own policies.
Draghi said that it had led to scams and made prices go up because customers didn’t have to negotiate with builders about prices because they knew they would get their money back.
Industry Minister Giancarlo Giorgetti said that it was “drugging the sector and contributing to inflation.”
Eurostat data shows that Italy’s construction cost inflation in the fourth quarter of last year was only 5.5%, which is a lot less than the average of 8.9% for the euro zone.
MORE REGULATIONS
In an effort to stop fraud, Draghi put limits on how many times tax credits could be sold from one bank or company to another. This took away from the way the scheme worked.
Uncertainty about the rules and hostile comments from ministers hurt confidence, and one by one, the biggest banks in the country stopped buying tax credits from customers and builders, leaving them without money for work done.
Claudio Giovine, head of economic analysis at Italy’s small business lobby CNA, says that more than 33,000 businesses are at risk of going bankrupt, which could cost 150,000 jobs.
This month, a survey of the group’s members found that 60,000 firms don’t have enough money because they can’t sell the tax credits they got as payment for work.
The CNA thinks that the value of these blocked credits is more than 5 billion euros. The survey found that as a result, 50% of the companies are delaying payments to their suppliers, 30% have stopped paying their taxes, and 20% are not paying their workers. Nearly half of them said they might have to shut down their business.
What happens in the next few weeks will determine whether or not last year’s boom turns into a full-blown bust.
Italy’s economy is already going nowhere, so worried parties have sent many proposals to parliament to bring back the superbonus.
These include letting banks sell their tax credits to small businesses with a turnover of more than 50,000 euros and letting banks use the credits to buy government bonds. We still don’t know if Draghi will agree with these ideas.
Toth, the owner of a construction company, said that industry data over the summer will be “awful” and that the only way to save the scheme is to allow tax credits to be traded with anyone again, even though some companies may have broken the rules.
“Everything was going so well last fall,” he said. “It was cut off in such a harsh way.”
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