Italy to Cut EU1.1 Billion of Spending to Meet Deficit Target

Italian Prime Minister Enrico Letta’s cabinet approved 1.1 billion euros ($1.5 billion) of spending cuts and plans to sell real estate to meet deficit targets.

The divestitures and cuts will be spread across various ministries and bring Italy’s deficit to within 3 percent of gross domestic product this year, Finance Minister Fabrizio Saccomanni told reporters yesterday. The government will raise 500 million euros selling property to Cassa Depositi e Prestiti SpA or other state-owned companies, he said.

Letta, 47, has struggled to find the right mix of fiscal measures to end Italy’s recession and ensure budget goals are respected. In June, he delayed an increase in the value added tax by three months, while in August he cut some property levies. Unemployment nonetheless returned to a record high in August and the tax breaks risked keeping the deficit above the European Union limit of 3 percent of GDP.

“The government’s only attention-grabbing measures to date were the abolition of the tax on first properties and a postponement of the VAT hike,” Joerg Kraemer, chief economist at Commerzbank AG, said in an Oct. 4 report. “Both measures may have supported the economy near-term but simultaneously worked to worsen the outlook for public finances.”

The property sold by the government will eventually be put on the market by the CDP, Saccomanni said.

Letta is taking greater control of tax policy as the influence of former Prime Minister Silvio Berlusconi diminishes. Berlusconi, the driving force behind the property-tax cut, fell out with Letta and failed to topple the government on Oct. 2 after senior members of his party abandoned him.

Reducing Deficit

The measures are intended to square accounts this year, while a broader revision to the tax code will be put before the Cabinet within the next week as part of the 2014 budget law. Letta, who has committed to reducing the deficit to 2.5 percent of GDP next year, is counting on spending reductions to help fund a planned cut to the payroll tax as of January.

Italy’s unemployment rate rose more than forecast in August, matching an all-time high of 12.2 percent, as companies remained concerned that the country’s longest recession since World War II wouldn’t end soon. The economy, which has contracted since the third quarter of 2011, showed signs of continued weakness as industrial production unexpectedly fell in July.

To contact the reporters on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net; Andrew Frye in Rome at afrye@bloomberg.net

To contact the editors responsible for this story: Jerrold Colten at jcolten@bloomberg.net; James Hertling at jhertling@bloomberg.net

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