FACTBOX-Italy readies austerity package

By Gavin Jones

ROME, May 21 (BestGrowthStock) – Italy will present measures next
week to cut its budget deficit by some 13 billion euros in 2011,
the first phase of a two-year plan to bring the gap back below
the EU’s 3 percent of gross domestic product threshold in 2012.

Following are some measures likely to feature in the
package, which sources say may be approved by the cabinet on
Tuesday, with approximate estimates of the savings possible,
according to Treasury sources and government officials.

* Freeze on public sector hiring and pay rises, pay cuts for
highly paid civil servants and politicians: 5-6 bln euros
* Block on retirement for a few months for those approaching
retirement age: 2-4 bln
* Reduced funding to municipal governments: 1-2 bln
* Cuts in government purchases of goods, services: 1-2 bln
* Crackdown on tax evasion, false benefit claims, illegal
building work: 1 bln
* Reduction in fiscal incentives for companies: 0.5 bln

WHEN WILL THE MEASURES TAKE EFFECT?

The above measures will take effect in 2011.

However one Treasury source said the government may bring
some of them forward to 2010 in order to reassure financial
markets and help re-finance military missions abroad and
cash-strapped public road-builder ANAS.

HOW URGENT IS DEFICIT REDUCTION FOR ITALY?

Italy has been spared the worst of the market volatility
since Greece’s debt crisis exploded, thanks mainly to the
cautious fiscal policy of Economy Minister Giulio Tremonti,
meaning it is now under less pressure to adopt draconian cuts.

Italy shunned large-scale stimulus during the recession of
2008 and 2009 and its deficit, at a projected 5 percent of GDP
in 2010, rose far less than in Greece, Spain, Portugal, Ireland
or Britain, which are all in or close to double digits.

However Italy remains vulnerable due to its massive public
debt of around 118 percent of GDP. Markets and ratings agencies
want evidence that recent rises in the debt can be reversed
through structural deficit cuts and pro-growth policies.

WHAT ARE ITALY’S MOST RECENT ECONOMIC FORECASTS?

Following are the government’s multi-year targets issued on
May 6. Previous forecasts, issued in January, are in brackets.

2010 2011 2012
GDP 1.0% (1.1%) 1.5% (2.0%) 2.0% (2.0%)
DEFICIT/GDP 5.0% (5.0%) 3.9% (3.9%) 2.7% (2.7%)
DEBT/GDP 118.4% (116.9%) 118.7% (116.5%) 117.2% (114.6%)
PRIMARY BALANCE* -0.4% (-0.1%) 1.0% (1.3%) 2.5% (2.7%)
UNEMPLOYMENT RATE 8.7% (8.4%) na (8.3%) 8.2% (8.0%)
TAX/GDP RATIO 42.8% 42.4% 42.3%

*excludes debt servicing costs

HOW WILL THE DEFICIT CUTS BE RECEIVED? ARE THEY SURE TO BE
APPROVED BY PARLIAMENT?

Prime Minister Silvio Berlusconi has an ample parliamentary
majority, meaning that in theory there should be little threat
of the package not being approved.

However, unions will be angered if the freezes on public
sector pay hikes and hiring are confirmed. Berlusconi has a bad
track record for facing down public protest and his popularity
has been dropping for months due to coalition bickering and
scandals over his private life and corruption in his government.

There is a risk that discontent over the cuts could increase
government instability, raise the chance of early elections or
even lead Berlusconi to row back on some of the measures.

AND THE MARKETS?

Analysts say the savings laid out so far look broadly
credible but are also concerned that some measures are temporary
rather than structural, such as the block on retirement and
public sector hiring freezes.

They would prefer to see legislation for a permanent
increase in the retirement age, which currently averages at 61.
This is also urged by the Bank of Italy and employers’ lobby
Confindustria but has been ruled out by government officials.

As such, the package is unlikely to produce any market
backlash but is also unlikely to safeguard Italy in future if
market volatility increases or the government’s survival looks
at risk.

Stock Investing

(Additional reporting by Giuseppe Fonte, Paolo Biondi,
Francesca Piscioneri; editing by Patrick Graham)

FACTBOX-Italy readies austerity package