Italy Approves $64 Billion Plan to Balance Budget in 2013 to Defend Bonds

Italian Prime Minister Silvio Berlusconi’s Cabinet approved 45.5 billion euros ($64 billion) in deficit cuts to balance the budget and try to convince investors the country can tame the region’s second-biggest debt.

The plan will raise the capital gains tax, increase levies on the highest earners, cut government spending and reduce funding to regional administrations. It was passed last night in Rome by decree, meaning it will take effect immediately and then must be approved by parliament within 60 days.

“Our heart is bleeding as we have always maintained that we wouldn’t put our hands in the pockets of Italians, but the international scenario has deeply changed,” Berlusconi said after the meeting. “The measures go in the direction that the ECB wanted.”

The European Central Bank had asked Italy to make additional budget cuts before it would buy the nation’s debt on the market in a bid to arrest surging borrowing costs. Yields on Italy’s 10-year bond have plunged 105 basis points since the ECB started the purchases on Aug. 8, after reaching a euro-era high of 6.3 percent on concern Italy would become Europe’s next debt victim.

Berlusconi said he’s confident the decree won’t need a confidence vote in Parliament. The Northern League, Berlusconi’s main ally, is “satisfied” with the measures, Industry Ministry Paolo Romani said yesterday. The League’s leader Umberto Bossi had said he would have fought against any pension cuts.

Balanced Budget

The package includes 20 billion euros of deficit-reduction measures to trim the budget gap to 1.4 percent of gross domestic product next year. Another 25 billion euros of cuts will come in 2013 to allow a balanced budget a year earlier than pledged in the government’s original 48 billion-euro plan last month.

Under the package, which is mainly in addition to the previous plan, the capital-gains tax will be increased to 20 percent from 12.5 percent, and the highest earners will pay an extra 5 percent tax on income over 90,000 euros a year and 10 percent on income of more than 150,000 euros. The wealth tax will be applied from this year and will fetch about 1 billion euros a year, along with taxes on gaming and tobacco and a crackdown on tax evasion, Tremonti said at a press conference in Rome today.

Regional Entities

Contributions to regional entities and administrations will be cut by 9 billion euros over the two years, and 8.5 billion euros trimmed from government ministries. A levy on energy companies is expected to generate about 2 billion euros, Tremonti said.

The government approved the liberalization of professional services and local public service companies and measures to make local labor contracts possible, which gives legal backing to contracts struck by carmaker Fiat SpA (F) for two of its plants. It also approved Italy’s contribution to the expanded European Union rescue facility

“While the impact of service-sector liberalization and privatizations may be positive on medium-term growth, the budget cuts are likely to have quite negative effects on the short-term GDP dynamic,” Citigroup Inc. economists including Giada Giani in London wrote in a note yesterday. “We expect Italian GDP growth to slow to close to zero in 2012 and 2013.”

Growth Forecasts

Tremonti said today the government doesn’t plan to revise growth forecasts while the 2011 deficit may be lower than originally predicted as some new measures take immediate effect. Italian economic growth has trailed the euro-region expansion for more than a decade, fueling concern among investors that balancing the budget without spurring growth won’t be enough to lower a 1.9 trillion-euro debt. Even with the drop in the country’s bond yields on ECB buying, the cost of insuring against an Italian default reached a euro-era record this week.

“It is clear that the crisis doesn’t affect just our country, it can also affect other European countries” Tremonti said, adding that problems will persist until a plan to sell so- called common eurobonds to fund member countries is approved. He added there are “great expectations” for the Franco-German summit on Aug. 16.

Pier Luigi Bersani, leader of the main opposition Democratic Party, said the decree “doesn’t resolve the country’s problems” and is unfair, Ansa news agency cited him as saying.

Tremonti also said that the government is studying “hypotheses” of privatizations of state-controlled companies.

The benchmark FTSE MIB Index gained for a second day before yesterday’s approval, adding 4 percent. Still, the index has fallen 14 percent in the past month as stocks suffered from debt-crisis contagion. Securities market regulator Consob said yesterday it banned new net short positions on financial shares for 15 days, in line with similar moves in Spain, Belgium and France.

The austerity measures were “a case of necessity and urgency,” said Tremonti.

To contact the reporters on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net; Chiara Vasarri in Rome at ltotaro@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

Enlarge image

Silvio Berlusconi and Giulio Tremonti

Alessandra Benedetti/Bloomberg

Italy's prime minister Silvio Berlusconi, left, and Italy's finance minister Giulio Tremonti.

Italy's prime minister Silvio Berlusconi, left, and Italy's finance minister Giulio Tremonti. Photographer: Alessandra Benedetti/Bloomberg

4:45

Aug. 9 (Bloomberg) -- Francesco Garzarelli, chief interest-rate strategist at Goldman Sachs Group Inc. in London, discusses markets' reaction to the European sovereign-debt crisis and European Central Bank policy. He speaks with Sara Eisen and Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)