Italian Prime Minister Silvio Berlusconi announced a painful mix of tax increases and spending cuts on Friday to meet European Central Bank (ECB) demands for action on shoring up Italy’s strained public finances.
At an emergency evening Cabinet meeting, the government adopted an austerity package worth 20 billion euros (US$28.5 billion) next year and a further 25.5 billion euros the following year to bring the budget into balance in 2013.
The measures ranged from a special levy on incomes above 90,000 euros to higher taxes on income from financial investments and cuts in the cost of government, notably through a cull in the number of local politicians.
The ECB demanded accelerated deficit cuts from Italy as a condition for buying its bonds on the market after a sell-off sent Italian borrowing costs soaring and threatened to put the eurozone’s debt crisis on a new, unmanageable plane.
Berlusconi, who frequently boasts of “never putting his hand in the pockets of Italians,” said he agreed to the tax increases only reluctantly and the decision made his “heart drip blood.”
“We are personally very pained to have to adopt these measures,” he told reporters after the Cabinet had approved the plan.
After days of criticism for a lack of clarity over how it intended to meet the balanced budget target, Berlusconi and Italian Minister of Economy and Finance Giulio Tremonti delivered a harsh dose of austerity for Italy’s fragile economy.
Before the announcement, Italy’s biggest unions had pledged to oppose measures that hurt ordinary Italians, including pensioners.
“The tax hikes certainly won’t help the economy, which is already stagnating, and consumer confidence is sure to fall further,” said Raj Badiani, an economist at IHS Global Insight. “The new fiscal measures appear to be credible, but the real problem is on the reform front. We need a timeline for measures to liberalize the service sector and labor markets.”
Barclays Capital cut its forecast for Italian economic growth next year to 0.7 percent, just over half the government’s official 1.3 percent forecast.
At a press conference to explain the austerity package yesterday, Tremonti renewed a call for common European bonds, saying they would be the best solution for a debt crisis, which he said still risked spreading to other countries.
“A greater degree of integration and consolidation of public finances in Europe is necessary,” Tremonti said. “The best solution would have been the euro bond, with various possible models which could have been adopted.”
Despite a huge public debt, Italy, the eurozone’s third-largest economy, had kept out of the crisis until last month when doubts over its slack growth and the government’s ability to control finances triggered the sell-off of Italian bonds.
“The austerity plan is not perfect, but it’s probably the best we could have hoped for in the current political situation with resistance from inside and outside the ruling coalition, and considering they had to reformulate everything in a week,” said Chiara Corsa, an analyst with UniCredit in Milan.
Tremonti said there was no alternative to the measures if markets were to be reassured, and added that his new deficit targets were prudent.