US embassy cable - 02ROME17

UNCLAS SECTION 01 OF 02 ROME 000017 
 
SIPDIS 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
LABOR FOR ILAB 
PARIS ALSO FOR USOECD 
TREAS FOR OASIA HARLOW, JONES 
STATE PASS CEA 
STATE PASS FRB FOR GUST 
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 
4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958: N/A 
                       UNCLASSIFIED 
 
PAGE 02        ROME  00017  01 OF 02  021533Z 
TAGS: ECON, EFIN, ETRD, EFIN, ETRD, IT, ITECON 
SUBJECT: ITALIAN PARLIAMENT APPROVES 2002 BUDGET 
 
REF: (A) ROME 6001; (B) MILAN 769; (C) MILAN 770; 
 (D) ROME 6613, (E) ROME 5358 
 
1. SUMMARY: THE SENATE APPROVED ITALY'S 2002 BUDGET ON 
DECEMBER 22, WHICH HAD BEEN PREVIOUSLY PASSED BY THE 
CHAMBER OF DEPUTIES.  THE E17 BILLION PACKAGE, EQUAL TO 
1.3 PERCENT OF GDP, PROPOSES TO REDUCE THE DEFICIT/GDP 
RATIO TO 0.5 PERCENT, IN LINE WITH THE STABILITY PACT. 
THE 2002 BUDGET GRANTS NEGOTIATING AUTHORITY FOR THE 
EXECUTIVE BRANCH TO DRAFT TAX AND PENSION REFORM, AND 
REFORM OF BANK FOUNDATIONS (REF D).  IT ALSO RAISES 
MONTHLY MINIMUM PENSIONS (FOR THOSE OVER 70) TO ONE 
MILLION LIRE ($500); RAISES PERSONAL INCOME TAX 
DEDUCTIONS FOR CHILDREN, AND FOR HOUSE REMODELING UP TO 
END-2002; ABOLISHES SOME MINOR TAXES; PROVIDES FUNDS FOR 
RENEWAL OF CERTAIN LABOR CONTRACTS, AND FOR EDUCATION; 
AUTHORIZES PRIVATIZATION OF CERTAIN STATE AGENCIES AND 
MUNICIPAL UTILITIES; AND PARDONS BUILDERS OF ILLEGAL 
BUILDINGS ON STATE PROPERTY. END-SUMMARY 
 
2002 BUDGET 
----------- 
2. BEATING THE DECEMBER 31 DEADLINE, THE SENATE APPROVED 
ON DECEMBER 22 ITALY'S 2002 BUDGET.  THE 2002 BUDGET 
TOTALS E17 BILLION (1.3 PERCENT OF GDP).  THIS INCLUDES 
AN E7.9 BILLION (0.6 PERCENT OF GDP) ECONOMIC STIMULUS 
PACKAGE AND AN E9.1 BILLION REDUCTION OF THE DEFICIT/GDP 
RATIO FROM 1.7 TO 0.5 PERCENT AT THE END OF 2002. THE 
                       UNCLASSIFIED 
 
PAGE 03        ROME  00017  01 OF 02  021533Z 
E7.9 BILLION STIMULUS PACKAGE INCLUDES E5.2 BILLION IN 
SPENDING INCREASES AND E2.7 BILLION LIRE IN LOWER TAX 
REVENUES. 
3. THE BUDGET INCLUDES E4.6 BILLION IN SPENDING CUTS, 
MOSTLY IN THE HEALTH SECTOR (REF E), AND E4.1 BILLION IN 
NEW REVENUES.  THE NEW INCOME IS TO BE GENERATED FROM 
TAXES PAID BY COMPANIES MOVING FROM THE UNDERGROUND 
ECONOMY INTO THE FORMAL ONE, FROM THE AMNESTY GIVEN FOR 
THE REPATRIATION OF CAPITAL AND FROM CERTAIN ACCOUNTING 
MEASURES.  ANOTHER E8.3 BILLION IS TO BE RAISED FROM THE 
SALE OF GOI REAL ESTATE (E7.7 BILLION) AND FROM LOTTERY 
AND GAME PROCEEDS (E516.5 MILLION). 
 
4.  MAIN ELEMENTS OF THE 2002 BUDGET 
------------------------------------ 
 
A. MINIMUM PENSIONS: MINIMUM MONTHLY PENSIONS WILL BE 
RAISED TO E516 FOR THE 2.2 MILLION PENSIONERS WHO ARE 
OLDER THAN 70 YEARS AND HAVE AN OVERALL INCOME OF NO 
MORE THAN E6,700, EXCLUDING THEIR HOUSE. 
 
B. PERSONAL INCOME TAX DEDUCTIONS: TAX DEDUCTIONS FOR 
CHILDREN WILL INCREASE PROGRESSIVELY WITH THE INCOME. 
 
C. HOME REMODELING: TAX DEDUCTIONS FOR HOUSE REMODELING 
WILL BE EXTENDED TO DECEMBER 31, 2002. 
 
D. ABOLITION OF SOME MINOR TAXES. 
 
E. LABOR CONTRACTS, EDUCATION, AND KINDERGATENS: E1.3 
BILLION IS INCLUDED FOR LABOR CONTRACT RENEWALS IN THE 
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PAGE 04        ROME  00017  01 OF 02  021533Z 
PUBLIC SECTOR DURING 2002, AND E2.4 BILLION IN 2003 AND 
2004.  E1.1 BILLION IS INCLUDED FOR TEACHERS' SALARIES 
THROUGH 2004.  E310 MILLION IS INCLUDED FOR 
KINDERGARTENS.  PUBLIC OFFICES WILL BE ALLOWED TO CREATE 
KINDERGARTENS FOR THE CHILDREN OF THEIR WORKERS; 
 
F. PRIVATIZATION OF STATE AGENCIES AND MINICIPAL 
UTILITIES: THE GOI WILL INDICATE CERTAIN PUBLIC ENTITIES 
TO TRANSFORM INTO JOINT STOCK COMPANIES OR FOUNDATIONS. 
THIS MEASURE MAY BE APPLIED TO HOSPITALS, CLINICS AND 
MEDICAL RESEARCH CENTERS.  THE 2002 BUDGET ALSO CONTAINS 
MEASURES INTENDED TO FOSTER THE PRIVATIZATION OF 
MUNICIPAL UTILITIES; 
 
G. PARDON FOR ILLEGAL BUILDING ON PUBLIC PROPERTY: 
BUILDINGS CONSTRUCTED ILLEGALLY ON PUBLIC PROPERTY BEFORE 
1990 WERE MADE LEGAL. 
 
H. BANKING FOUNDATIONS: THE REFORM IS COVERED IN DETAIL 
 
                       UNCLASSIFIED 
 
                           UNCLASSIFIED     PTQ1398 
 
PAGE 01        ROME  00017  02 OF 02  021534Z 
ACTION EUR-00 
 
INFO  LOG-00   AID-00   CEA-01   CIAE-00  CTME-00  DODE-00  EB-00 
      EXIM-01  E-00     UTED-00  FOE-00   VC-00    FRB-00   H-01 
      TEDE-00  INR-00   ITC-01   LAB-01   AC-01    NSAE-00  OMB-01 
      OPIC-01  ACE-00   SP-00    SSO-00   STR-00   TRSE-00  USIE-00 
      FMP-00   G-00     SAS-00     /008W 
                  ------------------528296  021534Z /48 
P 021515Z JAN 02 
FM AMEMBASSY ROME 
TO DEPT OF TREASURY WASHDC PRIORITY 
SECSTATE WASHDC 1478 
INFO USDOC WASHDC 
EU MEMBER STATES COLLECTIVE 
USEU BRUSSELS 2492 
AMCONSUL MILAN 
AMCONSUL FLORENCE 
AMCONSUL NAPLES 
AMCONSUL FRANKFURT 
 
UNCLAS SECTION 02 OF 02 ROME 000017 
 
SIPDIS 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
LABOR FOR ILAB 
PARIS ALSO FOR USOECD 
TREAS FOR OASIA HARLOW, JONES 
STATE PASS CEA 
STATE PASS FRB FOR GUST 
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 
                       UNCLASSIFIED 
 
PAGE 02        ROME  00017  02 OF 02  021534Z 
4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, IT 
SUBJECT: ITALIAN PARLIAMENT APPROVES 2002 BUDGET 
 
IN REF D. 
 
I.  TAX AND PENSION REFORM:  THE GOI IS AUTHORIZED TO 
START WORK ON DRAFT REFORMS. 
 
COMMENT 
------- 
5. BERLUSCONI'S ECONOMIC PROGRAM WAS ADVANCED BY THE 
ENACTMENT OF THE 2002 BUDGET. DESPITE THE UNCERTAIN 
ECONOMIC OUTLOOK, THE GOI WAS ABLE TO GAIN APPROVAL OF A 
STIMULUS PACKAGE AND AUTHORIZATION TO DRAFT REFORMS OF 
THE TAX AND PENSION SYSTEMS. ONLY THE REFORM OF THE 
BANKING FOUNDATIONS (REF D) CREATED SOME CONTROVERSY, 
TRIGGERING TOUGH OPPOSITION FROM THE FOUNDATIONS 
THEMSELVES AND CERTAIN CENTER-LEFT POLITICIANS. THIS AND 
THE PARDON FOR ILLEGAL BUILDERS ON STATE PROPERTY ARE 
EXAMPLES OF HOW THE BUDGET LAW CAN BE USED TO GAIN QUICK 
PASSAGE OF CONTROVERSIAL LAWS WITHOUT A SERIOUS DEBATE IN 
PARLIAMENT.  THE PARDON FOR ILLEGAL BUILDERS IS A 
TRADITIONAL TYPE OF POLITICAL BENEFIT FOR VOTERS IN 
SOUTHERN ITALY, WHERE SUCH ILLEGAL CONSTRUCTION IS 
COMMON.  BERLUSCONI'S COALITION, AND THE CDU/CCD IN 
PARTICULAR, IS VERY STRONG IN SOUTHERN ITALY. END COMMENT 
POPE 
 
                       UNCLASSIFIED 
 
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                       UNCLASSIFIED 
 
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 2002ROME00017 - Classification: UNCLASSIFIED