announced it a couple of days ago, “The time has come for sacrifices,” and they will be “very heavy, very hard and let’s hope temporary.” And yesterday, in an effort to comply with the International Monetary Fund calling on Italy not to relax fiscal discipline, to reduce the public debt and boost its long-term growth rate, the government of Silvio Berlusconi approved budget cuts of up to €24 billion ($29.7 billion) over the next two years. The austerity package is the most stringent put in place since Italy tightened its belt in the late 1990s to enter the euro.
This should hopefully bring the deficit back below 3% of GDP (3.9% in 2011 and 2.7% in 2012) from last year’s 5.3%—which is, after all, relatively modest compared with other EU countries—and offer reassurance about the country’s accounts to financial markets.
“This is not a classical budget law. It is an intense discontinuity for the system that all of us must understand,” said Finance minister Giulio Tremonti. “What we did last night is a change of direction,” Berlusconi’s Public administration minister, Renato Brunetta, said on Sky Italia. “Enough uncontrolled costs of the state.” And, perhaps, they both are right. Why? Well, first of all because the government will carry out half of the cuts by reducing the amount of funds that Italy’s central government allocates to regions and cities. This means that major regions running large deficits (Lazio, Campania and Calabria) will be forced to raise business and income taxes. And it was time for this to happen, in my humble opinion. After all, as Stefano Manzocchi, international economics professor at Rome’s Luiss university, puts it, ”Italy is like a microcosm of Europe,” and just as Brussels labors to impose fiscal discipline on Athens, so Italy’s central government has (always had) to fight a desperate battle to control the debt-laden finances of its own wayward regions, and that’s perhaps the most serious challenge that the country is facing today. Furthermore, provincial governments with less than 220,000 inhabitants and some publicly funded think-tanks will be abolished. This is what one might call “structural cuts,” or at least this is how, in my deep ignorance (this is the plain truth, believe it or not…), I understand it. But “structural cuts” is exactly what everyone was hoping for from the government …
Other key measures in the plan include a crackdown on tax evasion and false benefit claims (100,000 checks per year in 2010-2012 on claims for invalidity pensions, and a ban on cash payments for sums above 5,000 or 7,000 euros). The rest, so to speak, is just routine.
However, analysts say the plan is an encouraging first step, though probably not enough, in the long run. “We feel this should be a forerunner of a prolonged period of better fiscal management,” said Raj Badiani, of IHS Global Insight. And I personally couldn’t agree more, if this may be of any interest to you readers.