Italian cabinet prepares austerity package

May 25, 2010

ByGuy Dinmore and Giulia Segreti  Published: May 25 2010

Italy’s centre-right government last night approved an emergency 24bn euro deficit-cutting budget over the next two years, including an immediate freeze on public sector wages, in an effort to shore up market confidence in Rome’s ability to sustain Europe’s highest level of public debt.

The austerity package, which a senior official said would entail “tough sacrifices”, was the most stringent put in place since Italy tightened its belt in the late 1990s to enter the euro. It follows similar cutbacks announced in Greece, Ireland, Portugal, Spain, Germany and the UK.

The cuts were immediately attacked by CGIL, the largest trade union federation, and the centre-left opposition as unfairly targeting the lowest paid among 3.5m public sector workers while leaving the rich virtually unscathed.

Leaders of regional and local governments who face cuts in 2011 and 2012 of some 13bn euros in government funding protested that essential services, including health care, would be affected.

Nicki Vendola, left-wing governor of the southern region of Puglia, slammed comments by Silvio Berlusconi, prime minister, that the state would “not put its hands in the pockets of Italians” by saying all ordinary citizens would be hurt by the cuts while “there is not a word on taxing the rich”.

The cutbacks come at a difficult moment for the government with its popularity ratings plunging following a series of high-level corruption scandals and consumer surveys showing Italians losing confidence after a 5 per cent contraction in the economy last year.

Natacha Valla, economist at Goldman Sachs, said the government faced a “delicate trade off – reassuring markets — Italy is absolutely pivotal on that front — but sharing the pain equitably.”

Other measures in the 30-page budget document included a six-month deferment of new state pensions and a decision to bring forward plans that would see women retiring at the same age of 65 as men. Civil service recruitment will be chopped back with only one in five departing workers replaced.

Ministers, senior state officials and parliamentarians are to take a 10 per cent cut in salaries following public uproar over an earlier proposal to enforce a 5 per cent reduction. Several state entities, including research centre ISAE, are to be closed.

Major regions running large deficits – including Lazio, Campania and Calabria – will be forced to raise business and income taxes even though Mr Berlusconi has repeatedly ruled out tax increases.

The cutbacks will be joined by an intensified crackdown on tax evasion. Fraudulent claims of invalidity pensions will be targeted. The limit for payments in cash for goods and services will be reduced to 7,000 euros from 12,000. Government sources said Mr Berlusconi opposed a proposal by Giulio Tremonti, finance minister, to set a maximum of 5,000 euros.

Guglielmo Epifani, CGIL leader, said he would press for changes when the government decree comes before parliament. Mr Berlusconi’s coalition has a comfortable majority but could face pressure from some allies over the penalising of deficit-spending regions in the backward south.

Since the global financial crisis erupted in 2008, Mr Berlusconi has assured Italians that they were safe from contagion. Now austerity and sacrifice have entered the vocabulary with Gianni Letta, his under secretary, saying Italy had to act to save itself from a Greek-style crisis.

“The fairy tale is over,” commented Repubblica, a pro-opposition newspaper.

Mr Tremonti aims to bring the budget deficit under 3 per cent of GDP by 2012 from 5.3 per cent in 2009. The total two-year adjustment amounts to 1.6 percentage points of GDP. Italy’s deficit levels are relatively modest compared with its peers, but public sector debt – projected to exceed 118 per cent of GDP this year – is the highest in Europe.

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