US embassy cable - 04ROME2789

UNCLAS  ROME 002789 
 
SIPDIS 
 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
PARIS ALSO FOR USOECD 
TREAS FOR OASIA HARLOW, STUART 
FRANKFURT FOR WALLAR 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ELAB, PGOV, IT, EUN 
SUBJECT:  GOI PASSED PASSES A DEFICIT REDUCTION PACKAGE 
 
REF: A) ROME 2653 
 
     B) ROME Economic scorecard2630 
 
Summary 
------- 
 
1. As previously announced by PM Berlusconi, the Italian 
Cabinet passed on July 9 by decree law a euro 7.5 billion, 
or 0.6 percent of GDP deficit reduction package, as under 
pressure from the EU European Commission had requested.  The 
package includes euro 4.2 billion in structural spending 
cuts, euro 1.3 billion in tax reductionsincreases, and euro 
two billion in one-off measures (state-owned property sales 
and delay of expenses).  GOI also extended to December the 
deadline for the amnesty for illegal builders.  While such 
additional budget measures are reportedly viewed positively 
at the EU level, domestically both unions and industry 
representatives foresee a negative impact on economic 
growth.  End- summary. 
 
The Additional 2004 Budget Package 
---------------------------------- 
 
2. Following through on PM Berlusconi's promise to at the 
July 5 ECOFIN meeting, the GOI on June 9 has approved a 
deficit reduction package to for the 2004 budget that should 
reduce the deficit by euro 7.5 billion euros, or 0.6 percent 
of GDP.  This additional budget measure was approved by 
means of a decree-law (thatwhich goes immediately into force 
immediately, though Parliament must approve the decree-law 
after the release in the Official gazette nad have to be 
within sixty days) . (Note: if it is not, it is common 
practice to re-issue another decree law in slightly changed 
format until the Parliament can take action. End note.)  and 
will reportedly allow Italy to remainThe measure is intended 
to keep Italy within the three percent EU-mandated deficit 
ceiling in 2004.  The package includes euro 4.2 billion in 
structural spending cuts, euro 1.3 billion in tax 
reductionsincreases, and euro 2 billion in one-off measures 
(state-owned property sales and delay of expenses).  The GOI 
also extended to December the deadline for the amnesty for 
illegal builders, hoping to attract additional revenue from 
fees paid by those seeking to legalize previously-unapproved 
construction projects..  The measure also cuts special funds 
to institutions, including the Italian postal service and 
the Italian state railways, with estimated savings of euro 
350 million.  The package also includes cuts to the MFA's 
development cooperation fund. 
 
3. The largest part of the euro 4.2 billion euro spending 
cut is a euro 2.6 billion cut in euro of the administrative 
spending, implemented through a fifteen percent cut of in 
ministries' spending and a ten percent cut in transfers to 
spending of local governments.  The Ministry of Defense 
(MOD) is the ministry most affected by the cuts, though the 
approximately euro one billion in MOD cuts was reduced from 
euro 1.8 billion after much criticism that the original cuts 
would have "paralyzed" the armed services.      GOI The plan 
also cut reduces transfers to the Mezzogiorno (the 
underdeveloped southern third of the countryItaly) by euro 
1.25 billion euro.  This amount includes a decrease in cut 
to funds for aimed to employment support employment to 
companies operating in the south. 
 
4. On the revenue side, the GOI plans to raise euro 1.3 
billion euro from banks, insurance companies, and on trade 
institutions.  For insurance companiesT the decree increases 
the annual tax on the insurance reserves of insurances and 
pension funds from 0.20 to 0.30 percent, which should.  This 
measure is aimed to increase revenues by euro 700 million 
euro.  GOI The plan also increased increases the tax base 
for IRAP,  (the regional tax on productive activities, to 
banks, and bBrokerage firms) that is expected to produce 
euro 370 million in additional revenue euro.  For other 
institutions, first ofprimarily all banking foundations, the 
GOIGOI plan eliminates some certain tax benefits producing 
anthat should increase of tax pressure and revenues by euro 
230 million euro. 
 There is also a cut of special funds to some institutions 
such as Poste Italiane, National Mail Service, and State 
Railways and for special advisory services estimated at 350 
billion euro.  The package also includes cuts to MFA fund 
for cooperation to development. 
 
5. GOI also extended the deadline for the amnesty for 
illegal builders form July 31 to December 10.  This measure 
is aimed to have a positive impact on revenues and offset 
further possible shortfall. 
 
What next?Next Steps 
---------- 
 
65. The GOI must now would approvebe the preparation and the 
approval of the 2005-2008 DPEF (Documento di Programmazione 
Economica e Finanziaria (Economic and Financial Planning 
Document) or DPEF, a four-year economic plan that sets 
fourth economic/budgetary goals for each year through 2008. 
Approval of the plan is overdue, and the GOI is attempting 
to finalize it before the August vacation period.  On July 
8, in his role as talking as acting Finance Minister, PM of 
Economy atBerlusconi also told the annual meeting of the 
Italian banking association that he still plans to seek 
Parliamentary approval of pension reform legislation with a 
mentioned the GOI target to approve in Parliament the 
pension reform wit ha confidence vote before the summer 
recess. 
 
The EU "Early Warning" 
--------------------- 
 
76. The GOI's approved the deficit reduction package , which 
goesenters immediately into force, to thus helping Italy 
avoid an early warning from the European Union over 
theItaly's  rising budget deficit from the European Union. 
At the end of In late April, the EU European Commission had 
warned Italy that its deficit risked hitting 3.2 percent of 
GDP this year (3.5 percent, according to more recent 
estimates) and four percent in 2005, unless corrective 
measures were quickly taken.  On July 8, Berlusconi assured 
stated that "Italy intends to take all necessary steps to 
keep the deficit-to-GDP ratio under three percent," adding 
that, "Several several important European countries have 
exceeded this limit and intend to do so again." 
 
 
8. Italy's debt, equal to 106.2 percent of GDP in 2003, is 
the largest in the EU and the third largest in the World. 
The EU ministers also urged Italy to speed up the debt 
reduction process, saying they would continue to monitor 
progress in this area in 2004 and 2005. 
 
97. The EU reacted positively to the GOI decision deficit 
reduction package, withand the Commissioner for Monetary 
Affairs Joaquin Almunia said saying the measures "correspond 
more or less to what we were asking for. Now we have to see 
what happens next year, particularly regarding Italy's 
public debt."   (Note: Italy's public debt equaled 106.2 
percent of GDP in 2003, the largest in the EU and the third 
largest in the world.) 
 
Comment 
------- 
 
108. After three years of one-time measures and on-going 
debate with little result, the Berlusconi government, under 
the threat of the EU "early warning" and the downgrading of 
Italy's huge public debt, is passed a small, but still 
unpopular, deficit reduction package.  The tax increase and 
abolition of some incentives and transfers are expected to 
have a negative impact of on companies, investment and GDP 
growth, especially in the Southsouthern Italy.  Predictably, 
union, industry, and local government comments 
onDomestically the comments  the deficit reduction package 
were generally negative, mostly were generally negative. 
 
119. Even in this critical situation, however, the GOI 
cannot avoidcontinues to use some of the creative financing 
techniques of former Finance Minister Tremontie".  The GOI 
expects to save euro two billion euro from postponement of 
the some expenses, seal sale of some state properties, and 
extend extending the amnesty deadline for of the amnesty 
forillegal builders to December. 
 
1110. Unfortunately, this is only the first step of the post- 
Tremonti era.  The achievement ofKeeping within the EU three 
percent target limit in 2005, but also implementing 
Berlusconi's of thepromised tax cuts, would require very 
likely request aneven tougher budget cuts for FY 2005, 
 
estimated estimated atto be some euro 30 billion.  End 
Comment. 
 
SEMBLER 
 
 
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 2004ROME02789 - Classification: UNCLASSIFIED