Italy OK's new spending cuts

Italy's government approved 45.5 billion euros($63 billion Cdn) Friday in emergency austerity measures over two years to balance the budget by 2013 in response to demands by the European Central Bank.

The cabinet approved the package of cuts and new taxes despite fierce resistance from local government officials, who denounced the measures as socially unjust and as damaging to economic growth.

"It wasn't easy. We're personally pained to have taken these measures, but we are satisfied," Premier Silvio Berlusconi told a news conference after feverish talks with the opposition, regional governors and big city mayors.

The measures were whipped together in response to the ECB, which demanded a balanced budget a year earlier than anticipated as well as structural reforms to promote growth.

The cabinet approved 20 billion euros in cuts for 2012 and an additional 25.5 billion eurosfor 2013.

The measures include an extraordinary "solidarity" tax for high-earners. Anyone with an income over 90,000 euros a year will be assessed an additional five per cent tax in each of the next two years. The rate will be 10 per cent for incomes over 150,000 euros.

"Our hearts are bleeding. This government had bragged that it never put its hands in the pockets of Italians but the world situation changed," Berlusconi said, while insisting the emergency measures were "fair."

The solidarity tax was reminiscent of another by former premier Giulio Amato, who in July 1992 siphoned money out of every Italian bank account at a rate of six lire per 1,000 lire as the old Italian currency faced collapse. Just months later, Italy abandoned the European currency system and allowed the lira's value to be dictated by market forces during a period of intense currency speculation.

Berlusconi's "solidarity" tax could encourage greater tax evasion, as those who don't draw a declared salary from an employer might be tempted to hide income through cash payments to avoid the levy.

Berlusconi held urgent meetings with key parties to pass the cuts before a long holiday weekend, when most of the country shuts down.

But the hasty news conference by regional, provincial and city authorities held after the meeting with Berlusconi and Finance Minister Giulio Tremonti did not bode well for broad acceptance for new sacrifices.

Underclasses hurt most

The proposed cuts to such critical services as local transportation and welfare would have "a depressive effect," hurting most the underclasses and inhibiting the productive north of contributing to national GDP, Roberto Formigoni, the governor of the northern Lombardy state, told reporters.

Rome passed a 70 billion euros ($98 billion) austerity package last month, but the government has said the financial situation has deteriorated significantly since then and is seeking new measures.

Under intense pressure from the ECB and euro zone political leaders, the government agreed to bring forward its goal of balancing the budget to 2013 instead of 2014 as originally planned, and to come up with structural reforms that stimulate investment and growth.

In exchange, the ECB has been buying Italian bonds on the secondary market to hold down borrowing costs threatening to topple Italy's notoriously high public debt.

Local administrations were being asked to cut six billion euros ($8.4 billion) in spending next year, Formigoni said. That's from total additional proposed cuts of 20 billion euros in 2012. Austerity measures in 2103 would total 25 billion euros.

Formigoni and other officials want to draft alternatives to the government cuts. Formigoni said that Lombardy, one of Italy's most economically productive regions, would see its GDP suffer, which in turn would hurt national growth.

"We are facing cuts, not to the political class, not to the administration, but to social services," said Rome Mayor Gianni Alemanno.

Nationaldebt tops 1.9T euros

Both Formigoni and Alemanno are conservatives and allies of Berlusconi.

The government is seeking to stimulate Italy's stagnant economy which is expected to grow only by about one per cent this year. And while Italy's debt is among the highest in the euro zone at nearly 120 per cent of GDP poor growth is a key factor hindering Italy's ability to improve its public finances.

Italy's Central Bank on Friday said public debt in June topped 1.9 trillion euros for the first time.

Responding to increasing market nervousness, members of key lawmaking committees were called back last week fromtheir summer recess. And the full houses of parliament might reopen in August, ahead of schedule, because although government decrees become effective immediately, they still need to be converted to law by parliament within 60 days.

Tremonti's presentation to lawmakers Thursday failed to convince some of his own allies, a sign of possible rifts within the coalition. The opposition accused Tremonti of being too vague and insisted Berlusconi must resign.

Italian borrowing costs remained way below the levels they struck last week before theECB intervened in the markets to get them down. The yield on the 10-year bond is below five per cent compared with more than six per cent last week. The drop now makes it easy for Italy to keep up on its debt payments.