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Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Italy related comment. He also maintains a collection of constantly updated Italy economy charts together with short text updates on a Storify dedicated page Italy - Lost in Stagnation?


Wednesday, October 10, 2007

Are Prodi's Proposed Italian Budget Cuts For 2007 Too `Modest'?

This at any rate is the opinion Bank of Italy Governor Mario Draghi holds of Prime Minister Romano Prodi's 2008 budget. He stated yesterday that the budget proposals fail to cut spending and sufficiently reduce what is effectively the biggest government debt in the EU.

"Progress on deficit cuts is modest" Draghi said during testimony in Rome's Senate. Next year's proposed budget "doesn't take advantage of an increase in tax revenue to accelerate debt reduction" and puts at risk the objective to balance the budget by 2011.


Romano Prodi has proposed a spending package that cuts housing taxes, lowers levies for poor families, and boosts spending on public works, while polls indicate his popularity is sagging to an all-time low. All the members of Prodi's nine-way coalition resisted spending cuts, and some are threatening to vote against the budget - and the government - if the Prodi refuses to scale back plans to contain pension costs.

Draghi's criticism comes just two days after European Union Monetary Affairs Commissioner Joaquin Almunia said Italy's budget wasn't "ambitious" enough in it's attempts to tame the deficit and debt, which is forecast to fall to 105 percent of gross domestic product this year from 106.8 percent in 2006.

Also it comes hot on the tail of a decision by the EU finance ministers to urge the Debt Rating Agencies to be more vigilant. I'm sure the Italian case was not in the forefront of their minds when they took this approach, but as Claus Vistesen observes rather wryly, the Italian representatives may well have been sitting at the table with some uneasiness during this entire discussion.

Rather significantly Standard & Poor's said last week that the current budget plan won't alter its rating outlook, and it predicts Italy may fail to meet its goal of bringing the debt below 100 percent of GDP by 2010.

"In the absence of any significant structural reforms, Standard & Poor's believes that the government will fail to meet its target debt level of less than 100 percent of GDP by 2010" the rating agency said in a press note, and I'm sure the EU finance ministers said "quite right too".

All of this follows hot on the heels of declarations by Italian Finance Minister Tommaso Padoa-Schioppa that substantial tax cuts will only be possible once the government slashes interest payments on thedebt by half.

Italy's debt is "gigantic" and costs Italians 1,200 euros ($1,700) each annually, Padoa-Schioppa told the Italian Senate last week. "Halving debt servicing costs to 35 billion euros could free up money for cutting taxes..... but for now, interest expenses and widespread tax evasion limit the government's ability to trim taxes".

"We know that taxes are high in Italy.....No one brings up the fact that these two issues make our case truly singular."

Italy last year spent 69 billion euros servicing the debt, an amount that is twice the size of Slovenia's entire GDP.

3 comments:

Jesper said...

As I've understood it, the retirement age will be raised to 60 at the end of the year unless the current legislation is changed, and the proposal to delay this increase in the retirement age and only raise it to 58 is included in the budget. Is this correct?

Doesn't this mean that if coalition members do vote against the budget, and it does fail, the retirement age will be raised to 60 rather than 58 at the end of the year?

Edward Hugh said...

Hi Jesper,

"As I've understood it, the retirement age will be raised to 60 at the end of the year unless the current legislation is changed"

Yep. I think you've got that about right.

"and the proposal to delay this increase in the retirement age and only raise it to 58 is included in the budget"

Yes, that's it. I have covered this in some detail here and here

Basically all of this is only really delaying the inevitable, since even under the new agreement the retirement age will be raised to 60 in 2011.

"the retirement age will be raised to 60 rather than 58 at the end of the year?"

Yep, this is sort of shooting-yourself-in-the-foot-ism, but then this is nothing new.

And of course, bringing down the government can lead indirectly to another credit downgrade, which will mean even stronger cuts. So from here on in it only gets worse I'm afraid.

Jesper said...

Thanks, I've read those prevous posts (for those of us who don't understand Italian, this blog is probably one of the best sources of information on this slow motion disaster). I just wasn't sure whether the revised pension law was being voted on as part of the budget or separately.

What this means is presumably that if the budget fails, the fiscal outlook may actually become better than if it passes - even though the parties voting against the budget would prefer for the fiscal outlook to become even worse.

Italy has very serious problems, yet the best the Italian political system can accomplish is a situation where it might be better for the even-more-irresponsible parties to win this particular vote over the slightly-less-irresponsible ones. This would be funny if it weren't so deeply tragic.