Prodi's Cabinet Agrees Budget

The terms of Italy's 2007 draft budget were agreed by Romano Prodi's cabinet yesterday:

"The budget includes 20 billion euros ($25 billion) in spending cuts and 13.4 billion euros in revenue-raising measures, including tax increases, to bring the deficit within the European Union's limit of 3 percent of gross domestic product for the first time in five years."

The details aren't all yet clear, but obviously the package is a mixture of spending reductions and revenue raising.

The EU is watching to see if Italy sticks to its pledge to bring the deficit down to 2.8 percent of GDP next year from as much as 4.8 percent this year. The budget includes deficit- cutting measures worth about 15 billion euros, Finance Minister Tommaso Padoa-Schioppa said.

Part of the debate is about the proposed changes in personal taxation:

The changes to income-tax rates reverse cuts made by Berlusconi in 2004 that particularly benefited middle-income earners. Prodi plans to increase income taxes for those who earn more than 55,000 euros per year, while reducing them for those who make less than 40,000 euros per year. Details of the new rates will be announced before Oct. 2, Deputy Prime Minister Enrico Letta said.

and part is about the level of cuts in education, pensions and health care. The hard part for Prodi will be to hold his coalition together:

The state will cut spending on health care by 3 billion euros, on funding to local service agencies, which now will be free to levy their own taxes, by 4.6 billion euros, and on pensions by 9.5 billion euros, Padoa-Schioppa said.


However:

About 5 billion euros counted as a pension reduction is actually the transfer of severance pay to the state pension agency INPS, a move that could be rejected by the EU's accounting watchdog Eurostat, Padoa-Schioppa said.

Of course apart from passing the scrutiny of the EU Commission all this now has to go to the Chamber of Deputies and even more importantly to the Senate.