Letta Delivers Italian Tax Deal by Appeasing Berlusconi

Italian Prime Minister Enrico Letta passed cuts to an unpopular property tax in a deal that may mend relations with Silvio Berlusconi, his partner in a fragile coalition government.

The government plans to cancel a tax on primary residences this year and replace it in 2014 with a municipal levy, Letta told reporters late yesterday after a cabinet meeting in Rome. Berlusconi, a three-time former premier, praised the deal and said Letta had lived up to his word.

The agreement shows Letta’s ability to forge compromise, even as conflicts within his cabinet intensify and weigh on markets. Italian stocks began slipping Aug. 19 as talks stalled and Berlusconi’s allies, who spearheaded the tax-cut campaign, threatened to topple the government. Letta’s next task is to maintain cohesion when Berlusconi, now a senator, faces impeachment proceedings Sept. 9 in the upper house.

“Any deal is good,” said Raffaella Tenconi, an economist at Bank of America Merrill Lynch in London. “This is a step that tells me that there is cooperation” within the coalition, she said.

The benchmark FTSE MIB Index (FTSEMIB) was up 0.8 percent at 1:25 p.m. in Milan after closing 1 percent higher yesterday. The Treasury sold the maximum amount offered at a sale of five- and 10-year debt today, and consumer confidence increased more than economists forecast in August on expectations a tax-cut deal would be reached.

Spending Gap

The government is committed to keeping its budget deficit below 3 percent of gross domestic product this year, Letta said. Spending cuts, levies on gaming and value-added tax receipts will compensate for the loss of revenue from the property levy, Letta said. Full details will be given in the budget law later this year, he said.

Letta, 47, is seeking to build momentum in the economy as Italy shows signs of shaking off a recession that extended to eight quarters in the period through June. He is also trying to respect the budget discipline enacted by his predecessor, Mario Monti, to help fight the European sovereign debt crisis.

Letta’s decision was met with criticism from an ally of German Chancellor Angela Merkel. Michael Meister, deputy chairman of Merkel’s Christian Union caucus in parliament, said the tax cut threatens the stability that Monti brought to Italy.

Merkel Ally

“Instead of further stabilization progress with structural reforms and fiscal consolidation, Italy faces setbacks under the Social Democrat Letta,” Meister said in response to an e-mailed request for comment. “Letta must responsibly recognize the importance of Italy for the stability of the entire euro zone.”

The European Commission, the European Union’s executive arm, is waiting for Letta to specify how he’ll offset lost revenue to keep public finances in line with Italy’s EU commitments, Economic and Monetary Affairs Commissioner Olli Rehn told reporters today in Alpbach, Austria.

“Ensuring the sustainability of Italy’s public finances, and in particular reducing its very high public debt, is absolutely essential for restoring confidence and creating the conditions for a lasting recovery,” Rehn said. “I welcome Prime Minister Letta’s strong reassurance of Italy’s determination to respect its budgetary commitments for 2013.”

Property Values

The property-tax debate pitted Letta’s commitment to budget discipline against Berlusconi’s demands for tax cuts. Berlusconi said the levy, imposed last year as an emergency austerity measure, was unjust. Letta said yesterday the tax was unfair because the property values found in public registers were outdated. The new local tax will allow municipalities to make the levy more progressive, he said.

The deal allowed Berlusconi, founder of the People of Liberty party, to claim victory on his promise in the February election campaign to end taxation on primary residences.

“People of Liberty respected its pact with voters and Prime Minister Letta respected his pact” with the party, Berlusconi said in his statement.

The process to strip Berlusconi of his Senate seat begins with a committee meeting in the upper house and may take weeks or months before an eventual vote in the full chamber is called. He risks expulsion because his conviction for tax fraud was upheld on Aug. 1 by Italy’s top criminal court. Letta’s Democratic Party, the biggest force in the coalition, has said Berlusconi’s expulsion is required by an anti-corruption law enacted in December.

People of Liberty, the second-biggest party, claims the law is unconstitutional and shouldn’t be applied to Berlusconi, whose conviction stems from tax evasion in 2002 and 2003 at his Mediaset SpA television broadcaster.

Berlusconi is also appealing convictions in separate criminal cases for illegal use of wiretaps, abuse of power and engaging a minor in prostitution. He has denied all charges.

To contact the reporter on this story: Andrew Frye in Rome at afrye@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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