US embassy cable - 02ROME4053

C O N F I D E N T I A L ROME 004053 
 
SIPDIS 
 
E.O. 12958: DECL: 08/19/2007 
TAGS: ECON, EFIN, ELAB, EFIN, ELAB, EFIN, ELAB, IT, KPRP, ITECON, KPRP, ITECON, KPRP 
SUBJECT: KEY ECONOMIC POLICY-MAKERS ON GOI BUDGET ISSUES 
 
REF: A. A: ROME 2794 
 
                       CONFIDENTIAL 
 
PAGE 02        ROME  04053  01 OF 03  200811Z 
     B. B: ROME 3551 
 
CLASSIFIED BY: ACTING ECONOMIC COUNSELOR KATHLEEN DOHERTY FOR REASONS 1 
.5 (B) AND (D) 
 
 1. (SBU) SUMMARY. THE BALLOONING PUBLIC DEFICIT IS A MATTER 
OF GREAT CONCERN TO THE GOI, SEVERAL KEY ECONOMIC 
POLICYMAKERS TOLD ECONOMIC COUNSELOR DURING A SERIES OF 
RECENT MEETINGS. DEPUTY FINANCE MINISTER MARIO BALDASSARRI, 
FINANCE MINISTRY UNDER SECRETARY VITO TANZI, AND SENIOR 
RESEARCHER AT THE BANK OF ITALY DANIELE FRANCO EXPRESSED 
CONCERN ABOUT THE PUBLIC DEFICIT, WHICH IS LIKELY TO EXCEED 
THE 2002 TARGET OF 1.1 PERCENT. THE GOI FACES MOUNTING 
EXPENDITURES FOR HEALTH AND EDUCATION.  PENSION AND INTEREST 
PAYMENTS CANNOT BE CUT.  SECURITY AND DEFENSE COSTS HAVE 
PUSHED UP THE DEFICIT.  AT THE SAME TIME, THE GLOBAL ECONOMIC 
SLOWDOWN HAS PUSHED TAX REVENUES BELOW EXPECTATIONS.  FINANCE 
MINISTER TREMONTI HAS CHOSEN TO DELAY MEETING STABILITY PACT 
TARGETS FOR TWO YEARS TO ENCOURAGE ECONOMIC GROWTH.  HE PLANS 
TO CUT TAXES AND INVEST IN NEEDED INFRASTRUCTURE, WHILE 
EXERTING TOUGH PRESSURE ON OTHER GOVERNMENT SPENDING.  END 
SUMMARY. 
 
THE GOVERNMENT,S FIRST YEAR 
--------------------------- 
 
2. (SBU) THE MEETING WITH BALDASSARRI TOOK PLACE A FEW DAYS 
AFTER THE APPROVAL OF THE DPEF, THE 2002-2006 GOI BUDGET 
PLAN.  BALDASSARRI SAID THAT THE GOI HAD FACED DIFFICULT 
ECONOMIC CIRCUMSTANCES IN ITS FIRST YEAR.  HE MENTIONED THAT 
GOVERNMENT EFFORTS TO JUMP-START ECONOMIC GROWTH HAD BEEN 
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PAGE 03        ROME  04053  01 OF 03  200811Z 
UNDERMINED BY THE 2001 DEFICIT INHERITED FROM THE PREVIOUS 
ADMINISTRATION, USD 18 BILLION DOLLARS LARGER THAN EXPECTED, 
AND ECONOMIC REVERBERATIONS FROM SEPT. 11.  THE INHERITED 
DEFICIT AND THE ECONOMIC SLOWDOWN TOGETHER FORCED FINANCE 
MINISTER TREMONTI TO POSTPONE PLANS FOR TAX CUTS. 
 
3. BALDASSARI EXPLAINED THAT THE WORSENING INTERNATIONAL 
OUTLOOK FOLLOWING SEPT. 11 SLOWED THE ITALIAN GROWTH RATE 
FROM 2.3 PERCENT TO 1.3 PERCENT IN 2001, AND TO THE LIKELY 
ONE PERCENT OR LOWER IN 2002.  TO STIMULATE GROWTH IN 2003, 
THE GOI PLANS TO IMPLEMENT THE FIRST PART OF PLANNED TAX CUTS 
-- CUTTING TAXES FOR LOWER INCOME LEVELS. 
 
2002 PUBLIC FINANCE TRENDS 
-------------------------- 
 
4. (SBU) ON AUGUST 1, ECONOFFS MET WITH DANIELE FRANCO, CHIEF 
OF THE PUBLIC FINANCE DIVISION OF THE RESEARCH DEPARTMENT OF 
THE BANK OF ITALY.  FRANCO WAS ALSO PESSIMISTIC ABOUT PUBLIC 
FINANCE TRENDS IN 2002.  THE PUBLIC DEFICIT GREW FASTER IN 
THE FIRST HALF OF THIS YEAR THAN IN CORRESPONDING PERIOD LAST 
YEAR. THE PUBLIC DEFICIT WAS E31.1 BILLION THROUGH JULY 2002, 
UP 29 PERCENT OR 7 BILLION EURO OVER THE CORRESPONDING PERIOD 
IN 2001.  FRANCO POINTED TO THE SAME PROBLEMS AS HAD THE 
FINANCE MINISTRY OFFICIALS -- THE ECONOMIC SLOWDOWN HAD MEANT 
LOWER REVENUES, WHILE GOVERNMENT SPENDING HAD EDGED UP, 
PARTICULARLY IN THE AREA OF HEALTH CARE.  DEEP STRUCTURAL 
REFORMS WERE STILL NEEDED -- INCLUDING TAX REFORM AND PENSION 
REFORM. FRANCO ADDED THAT THE GOI'S PROBLEMS HAD BEEN 
COMPLICATED BY AN EUROSTAT DECISION TO REVISE THE 2001 PUBLIC 
DEFICIT FIGURE UPWARDS TO 2.2 PERCENT OF GDP.  EUROSTAT HAD 
                       CONFIDENTIAL 
 
PAGE 04        ROME  04053  01 OF 03  200811Z 
DISAGREED WITH THE GOI'S ACCOUNTING FOR SECURITIZED REVENUES 
FROM LOTTERY PROCEEDS AND REAL ESTATE SALES. 
 
5. (SBU) FRANCO NOTED THAT THE GOI HAD GENERATED EURO 50 
MILLION TO DATE FROM A MEASURE ALLOWING ITALIANS TO 
REPATRIATE CAPITAL HELD OVERSEAS (AND NOT DECLARED FOR TAX 
PURPOSES) IN RETURN FOR A ONE-TIME 2.5 PERCENT PENALTY. 
NONETHELESS, HE PREDICTED THAT THE 1.1 PERCENT DEFICIT/GDP 
TARGET FOR 2002 WOULD BE EXCEEDED. 
 
2003 BUDGET 
----------- 
 
6. (SBU)  BOTH TANZI AND BALDASSARI STRESSED THAT THE GOI 
FACES INTENSE PRESSURE TO BRING THE 2003 BUDGET DEFICIT DOWN. 
 WHILE FINANCE MINISTER TREMONTI HAD POSTPONED BALANCING THE 
BUDGET TO 2005 (FROM 2003), HE REMAINS FIRMLY COMMITTED TO 
KEEPING THE DEFICIT TO A MINIMUM.  AT THE SAME TIME, TREMONTI 
AND PRIME MINISTER BERLUSCONI HAVE PROMISED TAX CUTS AND NEW 
INVESTMENT IN INFRASTRUCTURE.  GIVEN THESE CONSTRAINTS, 
TREMONTI IS SEEKING TO CUT WHEREVER POSSIBLE AND TO CAP 
SPENDING IN ALL MINISTRIES. 
 
7. (U) FINANCE U/S TANZI EXPLAINED THAT HE HAD FOUND HIMSELF 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ6101 
 
PAGE 01        ROME  04053  02 OF 03  200812Z 
ACTION EUR-00 
 
INFO  LOG-00   NP-00    AGRE-00  AID-00   CEA-01   CIAE-00  COME-00 
      CTME-00  INL-00   DODE-00  DOEE-00  DOTE-00  ANHR-00  SRPP-00 
      EB-00    EXIM-01  E-00     FAAE-00  VC-00    FRB-00   H-01 
      TEDE-00  INR-00   ITC-01   LAB-01   L-00     VCE-00   MMP-00 
      AC-01    NSAE-00  NSCE-00  OIG-03   OMB-01   OPIC-01  ACE-00 
      SP-00    SSO-00   SS-00    STR-00   USIE-00  LBA-00   DRL-02 
      G-00     NFAT-00  SAS-00     /013W 
                  ------------------DB64DF  200813Z /38 
P 200738Z AUG 02 
FM AMEMBASSY ROME 
TO SECSTATE WASHDC PRIORITY 5459 
INFO EU MEMBER STATES COLLECTIVE PRIORITY 
AMCONSUL FLORENCE PRIORITY 
AMCONSUL FRANKFURT PRIORITY 
AMCONSUL MILAN PRIORITY 
AMCONSUL NAPLES PRIORITY 
DEPT OF TREASURY WASHDC PRIORITY 
USEU BRUSSELS PRIORITY 2792 
DEPT OF LABOR WASHDC PRIORITY 
 
C O N F I D E N T I A L SECTION 02 OF 03 ROME 004053 
 
SIPDIS 
 
E.O. 12958: DECL: 08/19/2007 
TAGS: ECON, EFIN, KPRP, ELAB, IT 
SUBJECT: KEY ECONOMIC POLICY-MAKERS ON GOI BUDGET ISSUES 
 
FAR MORE CONSTRAINED THAN HE HAD EXPECTED IN CUTTING 
                       CONFIDENTIAL 
 
PAGE 02        ROME  04053  02 OF 03  200812Z 
GOVERNMENT SPENDING. MUCH OF THE SPENDING SIMPLY CANNOT BE 
CUT.  POST-SEPTEMBER 11 SECURITY SPENDING AND MILITARY 
SPENDING FOR OPERATION ENDURING FREEDOM HAD BEEN COSTLY, BUT 
ESSENTIAL.  PENSION PAYMENTS ABSORB A TOTAL 18 PERCENT OF THE 
BUDGET, HEALTH SPENDING SIX PERCENT, EDUCATION AND OTHER 
SOCIAL SPENDING 12 PERCENT AND INTEREST ON ITALY,S FOREIGN 
DEBT ANOTHER 13 PERCENT. 
 
8. (U) THE HEALTH SECTOR REFORM, ADOPTED IN LATE 2001 AS PART 
OF ITALY'S DEVOLUTION OF AUTHORITY TO THE REGIONAL 
GOVERNMENTS, HAS NOT CONTAINED GOVERNMENT HEALTH SPENDING AS 
PREDICTED.  WHEN MANAGEMENT OF HEALTH CAR WAS DEVOLVED TO THE 
REGIONAL GOVERNMENTS, ALONG WITH THE FUNDING, TOTAL 
EXPENDITURES WERE CAPPED AT 6 PERCENT OF GDP.  HOWEVER, THE 
REGIONS HAVE (PARTICULARLY IN THE SOUTH) SPENT MORE THAN 
ALLOWED.  THE GOI IS LEGALLY FORBIDDEN TO SIMPLY DENY HEALTH 
CARE TO ITALIAN CITIZENS, AND THUS MUST PROVIDE THE 
ADDITIONAL FUNDING REQUIRED.  THE 2003 BUDGET LAW WILL, 
THEREFORE, HAVE TO INCLUDE ADDITIONAL FUNDING FOR HEALTH 
CARE.  TANZI NOTED THAT THE RISING COST OF HEALTH IS ONE OF 
THE MOST SERIOUS CONCERNS TO THE FINANCE MINISTRY. 
 
9. (U) THE 2003 BUDGET IS TIGHT, NOTED BALDASSARI, BUT 
INCLUDES SEVERAL ELEMENTS INTENDED TO SPUR ECONOMIC GROWTH. 
 
A. IMPLEMENTATION OF THE FIRST TRANCHE OF THE TAX REFORM, 
WHICH WILL BENEFIT LOWER INCOME FAMILIES, WHO ALSO ARE THOSE 
MOST AFFECTED BY THE PRICE INCREASES RELATED TO THE EURO 
CHANGEOVER. (DANIELE FRANCO OF THE BOI PREDICTED THAT THIS 
FIRST ROUND OF TAX CUTS WOULD COST SLIGHTLY OVER ONE PERCENT 
OF GDP.) 
                       CONFIDENTIAL 
 
PAGE 03        ROME  04053  02 OF 03  200812Z 
 
B. A LABOR PACT MADE WITH EMPLOYERS, REPRESENTATIVES AND THE 
MAIN TRADE UNION CONFEDERATIONS. (NOTE: THE PACT DOES NOT 
INCLUDE CGIL, THE LARGEST UNION IN TERMS OF MEMBERSHIP AND 
WHICH OPTED OUT OF THE PACT.) THE MOST IMPORTANT MEASURES OF 
THE PACT ARE THE 36-MONTH SUSPENSION OF ARTICLE 18 OF THE 
LABOR STATUTE FOR THOSE NEWLY HIRED IN COMPANIES WITH FEWER 
THAN 15 WORKERS, AND AN EXTENDED PAYMENT PERIOD OF 
UNEMPLOYMENT BENEFITS. (REF A PROVIDES BACKGROUND ON ARTICLE 
18 AND THE LABOR PACT.) 
 
C. IMPLEMENTATION OF AN AMBITIOUS INFRASTRUCTURE INVESTMENT 
PROGRAM (SEE PARA 12). 
 
10. (SBU) BALDASSARRI SAID THAT THE FINANCE MINISTRY HAS 
REDUCED ITS OWN COSTS FOR PROCURING GOODS AND SERVICES BY 
ONE-THIRD IN 2002, BY CREATING "CONSIP", WHICH HAS 
IMPLEMENTED A PROGRAM OF ON-LINE PURCHASING.  IN 2003, THE 
GOI WILL EXPAND ON-LINE PURCHASES OF GOODS AND SERVICES, 
THROUGH CONSIP, WHICH IS EXPECTED TO REDUCE THESE 
EXPENDITURES BY AT LEAST 10 PERCENT -- A SAVINGS OF 40-50 
MILLION EURO. 
 
A NEW TAX? AN AMNESTY? 
---------------------------- 
 
11. (C)  U/S TANZI (PROTECT) MENTIONED THAT THERE WERE TWO 
MORE MEASURES UNDER SERIOUS CONSIDERATION FOR THE 2003 
BUDGET: A ONE-TIME TAX AND A TAX AMNESTY.  TANZI SAW PROBLEMS 
WITH BOTH.  A ONE-TIME TAX WOULD RAISE SOME REVENUE, BUT 
WOULD BE AN UNPOPULAR MEASURE.  IT WOULD BE HARSHLY 
                       CONFIDENTIAL 
 
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CRITICIZED AS A BREAKING OF PRIME MINISTER BERLUSCONI'S 
PROMISE TO CUT TAXES.  THE PROPOSED AMNESTY FOR TAX EVADERS 
(PERMITTING THEM TO PAY A ONE-TIME PENALTY AND RETURN TO THE 
TAX SYSTEM) WOULD, IN TANZI'S OPINION, BE EVEN WORSE.  TAX 
PARDONS, HE ARGUED, ARE NEGATIVE BECAUSE THEY CREATE 
EXPECTATIONS FOR FURTHER TAX PARDONS IN THE FUTURE AND LEAD 
TO FURTHER EVASION.  MOREOVER, THEY ANGER LAW-ABIDING 
TAXPAYERS. 
 
INFRASTRUCTURE 
-------------- 
 
12. (SBU) THE 2003 BUDGET WILL INCLUDE AN INVESTMENT PROGRAM 
FOR PUBLIC SECTOR INFRASTRUCTURE ) ROADS PRIMARILY. TANZI 
ACKNOWLEDGED THAT IMPROVEMENTS IN INFRASTRUCTURE ARE A 
LONG-TERM GOI PROJECT; IN THE SHORT TERM, NO EFFECT ON GDP 
GROWTH IS EXPECTED. 
 
13. (SBU) DEPUTY MINISTER BALDASSARRI BELIEVES THAT THE GOI'S 
NEWLY CREATED COMPANY, INFRASTRUTTURE S.P.A., WILL ENSURE 
THAT INFRASTRUCTURE PROJECTS ARE DONE IMPLEMENTED ACCORDING 
TO PRIORITY AND ON A TIMELY BASIS. INFRASTRUTTURE S.P.A. WILL 
HELP FINANCE INFRASTRUCTURE AND PUBLIC WORK PROJECTS BY 
ISSUING BONDS. BALDASSARI DOWNPLAYED THE IMPACT ON THE PUBLIC 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ6103 
 
PAGE 01        ROME  04053  03 OF 03  200812Z 
ACTION EUR-00 
 
INFO  LOG-00   NP-00    AGRE-00  AID-00   CEA-01   CIAE-00  COME-00 
      CTME-00  DODE-00  DOEE-00  DOTE-00  ANHR-00  SRPP-00  EB-00 
      EXIM-01  E-00     FAAE-00  VC-00    FRB-00   H-01     TEDE-00 
      INR-00   ITC-01   LAB-01   L-00     VCE-00   MMP-00   AC-01 
      NSAE-00  NSCE-00  OIG-03   OMB-01   OPIC-01  ACE-00   SP-00 
      SSO-00   SS-00    STR-00   USIE-00  LBA-00   DRL-02   G-00 
      NFAT-00  SAS-00     /013W 
                  ------------------DB64E3  200813Z /38 
P 200738Z AUG 02 
FM AMEMBASSY ROME 
TO SECSTATE WASHDC PRIORITY 5460 
INFO EU MEMBER STATES COLLECTIVE PRIORITY 
AMCONSUL FLORENCE PRIORITY 
AMCONSUL FRANKFURT PRIORITY 
AMCONSUL MILAN PRIORITY 
AMCONSUL NAPLES PRIORITY 
DEPT OF TREASURY WASHDC PRIORITY 
USEU BRUSSELS PRIORITY 2793 
DEPT OF LABOR WASHDC PRIORITY 
 
C O N F I D E N T I A L SECTION 03 OF 03 ROME 004053 
 
SIPDIS 
 
E.O. 12958: DECL: 08/19/2007 
TAGS: ECON, EFIN, KPRP, ELAB, IT 
SUBJECT: KEY ECONOMIC POLICY-MAKERS ON GOI BUDGET ISSUES 
 
DEFICIT. SOME BONDS ARE EXPECTED TO BE BACKED BY THE SALE OF 
                       CONFIDENTIAL 
 
PAGE 02        ROME  04053  03 OF 03  200812Z 
GOI REAL ESTATE. THE GOI HOPES THAT SUCH SALES WILL GENERATE 
INCOME EQUAL TO FIVE PERCENT OF GDP. 
 
14. (U) THE BOI'S FRANCO NOTED THAT THE BUDGET DOCUMENT DPEF 
2003-2006 ASSUMES INVESTMENT IN INFRASTRUCTURE WILL EQUAL 
FIVE PERCENT OF GDP EACH YEAR.  FRANCO DOUBTS THAT GOI WILL 
BE ABLE TO FINANCE THIS LEVEL OF INFRASTRUCTURE INVESTMENT 
FROM PRIVATE FINANCING ALONE. 
 
PRIVATIZATIONS 
---------------- 
 
15. (U) ACCORDING TO BALDASSARI, THE BERLUSCONI GOVERNMENT 
PLANS TO ACCELERATE PRIVATIZATIONS DURING 2003, IF MARKET 
CONDITIONS IMPROVE.  THE FIRST TO BE SOLD WILL BE THE GOI'S 
TOBACCO MANUFACTURING COMPANY ETI.  FURTHER ASSETS OF THE GOI 
ELECTRICITY COMPANY ENEL WILL ALSO BE AUCTIONED IN 2003. THE 
GOI INTENDS TO SELL ALL BUT 30 PERCENT OF ENEL AND THE 
HYDROCARBONS FIRM ENI. BALDASSARI SAID THAT THERE WERE PLANS 
TO SELL OFF THE GOI'S RAILWAYS AND THE POSTAL SERVICE, BUT 
NOT IN THE NEAR TERM.  HE ADDED THAT THERE ARE NO PLANS TO 
PRIVATIZE THE NATIONAL TV NETWORK, RAI. 
 
COMMENT 
------- 
 
16. (SBU) THE GOI'S EXPERT FINANCE MINISTRY TEAM IS CLEARLY 
CONCERNED OVER THE FISCAL OUTLOOK.  NONETHELESS, FINANCE 
MINISTER TREMONTI HAS CHOSEN TO MOVE AHEAD WITH ESSENTIAL 
INFRASTRUCTURE INVESTMENT AND TAX CUTS.  WHILE THIS MAY DELAY 
ELIMINATION OF ITALY'S FISCAL DEFICIT, IT IS ESSENTIAL TO THE 
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ECONOMIC GROWTH OF THE COUNTRY. TREMONTI'S CREDIBILITY AND 
COMPETENCE ARE THE KEY ASSETS OF THE GOI AS IT FACES THE 
ECONOMIC STORMS AHEAD. 
SKODON 
 
                       CONFIDENTIAL 
 
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 2002ROME04053 - Classification: CONFIDENTIAL