Italy Spending Rate Cuts Worth 4.5 Billion Euros Aim To Head Off Sales Tax

07/05/2012 08:52 pm ET | Updated Sep 04, 2012

* 2012 cuts worth 4.5 bln euros, rising to 10.5 bln in 2013

* Cuts avoid hike in sales tax until July 2013

* Unions have threatened strikes, centre-left uneasy

By Giuseppe Fonte and Steve Scherer

ROME, July 6 (Reuters) - Italy's cabinet approved additional spending cuts of 4.5 billion euros ($5.57 billion) for this year on Friday as it seeks to keep a rein on its budget deficit, and said the savings would enable it to delay a planned sales tax rise until next year.

The new cuts, agreed by the cabinet after a meeting lasting nearly seven hours, will reduce health expenditure, halve the number of provincial governments, gradually trim the number of public-sector workers by 10 percent, and reduce state managers by 20 percent, according to a government statement. (For a FACTBOX on the spending cuts, see )

The new measures will have a bigger impact in the next two years when they will reduce annual government spending by 10.5 billion euros in 2013 and 11 billion in 2014, the government said.

Italy, the euro zone's third-biggest economy, remains under pressure to convince financial markets it can contain its high debt burden.

This year it has an ambitious target of slashing its budget deficit to 1.7 percent of GDP, from 3.9 percent in 2011.

The new savings for this year are in addition to planned government spending cuts of 10.5 billion euros for 2012, unveiled in an austerity package announced by Prime Minister Mario Monti in December.

The austerity package included a 2 percentage point increase on sales tax rates - currently set at 10 percent and 21 percent - due to take effect this October. The government on Friday said the increase would be delayed until July next year.

For Monti, delaying an unpopular sales tax increase, even if it is offset by cuts that anger labour unions, may be a good way to revive his popularity, which is hovering near its lowest level since he took office in November.

The government said the additional savings this year would also free up funds for emergency aid for the industrial Emilia-Romagna region, which was hit by earthquakes in May.

"The cuts will in no way reduce the quality of public services provided to citizens, and instead aim to improve quality and efficiency," Monti told reporters after the marathon meeting.

Monti's reassurance seemed to satisfy coalition partners Silvio Berlusconi's centre-right People of Liberty (PDL) party and the centrist UDC party but the centre-left Democratic Party (PD), the second-biggest party in the governing coalition, said it may seek to stop cuts to health and other public services.


Planned job reductions in the public sector have already drawn fire from unions, who have threatened a nationwide general strike.

The plans do not envisage significant lay-offs and will be achieved mainly through hiring freezes and schemes to encourage early retirement. The level of job reductions also refers to planned notional staffing levels rather than the number of people actually employed, which may be lower.

Though the theoretical number of job reductions is in the tens of thousands, Italy's financial newspaper il Sole-24 Ore estimated that the real job reductions would be only 7,247.

Staffing levels will be assessed by October, and some workers will be sent home for two years on 80 percent of their salary before being laid off or sent into retirement.

Public Administration Minister Filippo Patroni Griffi said after the meeting that he could not accurately estimate the number of jobs that would ultimately be cut.

Labour unions, who put up tough opposition to Monti's labour market reforms, which were approved by parliament last month, are fiercely resisting the job cuts and the centre-left PD has also expressed misgivings about the package.

"Regarding health care, there are aspects that worry us very much. There must be care not to deal a blow to the state health care system," Pier Luigi Bersani, leader of the PD, said on Friday.

Stefano Fassina, the PD's economic adviser, said the party would seek changes in parliament to cuts in spending on local governments and the regions, which will "compromise fundamental services."

By presenting the package as a decree, Monti will leave political parties less scope to amend and water down the measures. The decree is immediately effective, and must be passed by parliament within 60 days or else it expires.

Italy's deficit stood at 8 percent of GDP in the first quarter of 2012, up from 7 percent in the same period last year and the highest level since the start of 2009.

Italian borrowing costs have dipped since euro zone leaders agreed measures to try and contain the euro zone debt crisis last week but they are still relatively high with 10-year yields trading at just above 6 percent on Friday.

Among the decrees included in a 13-page statement released on Friday was a reduction in the network of small, state-owned companies, a halving of spending on automobiles by the public administration, and a centralisation of the purchase of goods and services by the state, especially in health care.

During a meeting later on Friday, the government also agreed to reduce the number of court houses and prosecutors' offices by merging them into larger offices in the same territory.