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Monti Cabinet Backs Spending Cuts to Replace Higher Taxes

Italian Prime Minister Mario Monti
Mario Monti, Italy's prime minister. Photographer: Ed Jones/Pool via Bloomberg

Italian Prime Minister Mario Monti replaced a looming sales-tax increase with a package of spending cuts, seeking to counter rising anger over the government’s demand for revenue.

Monti’s Cabinet approved 26 billion euros ($32 billion) of spending cuts over the next three years to delay for at least a year an increase in the value-added tax rate to 23 from 21, the prime minister’s office said in an e-mailed statement after a seven-hour meeting in Rome that ended at 1 a.m.

“This is the typical ’Italian-style’ reform that offloads the biggest chunk of the planned cuts onto the next government,” said Alberto Mingardi, head of the pro-free market Bruno Leoni research center in Turin. “The VAT increase is put back to July next year when this government won’t be in power anymore”

The plan comes as Monti tries to bring down surging bond yields by convincing investors he can reduce the euro-region’s second-biggest debt without relying too heavily tax increases. The latest round of spending cuts comes a month after a property levy was imposed, stoking nationwide protests.

The reductions would include 4.5 billion euros this year, 10 billion euros next year and 11.5 billion euros in 2014. With Italy mired in its second recession since 2009, the government was determined to find enough savings to put off the sales tax increase slated for October that was included by Monti in a December austerity package.

“The tax increase would have had serious consequences on the economy,” Deputy Finance Minister Vittorio Grill said. “This acted as a powerful incentive for the government, which stood united in this goal.”

Recession Deepening

The government expects the economy to shrink 1.2 percent this year, while employers lobby Confindustria predicts a 2.4 percent contraction. The yield on Italy’s 10-year bond rose 8 basis points to 6.05 percent as of 12:15 a.m. in Rome.

The “measures are expected to be neutral on public finances as additional savings will be mainly used to offset expected indirect tax shortfalls,” Fabio Fois, a European economist at Barclays Capital in London, wrote in a note to investors.

The spending review is “a continuing maintenance exercise,” Grilli said. Former Parmalat SpA Chief Executive Officer Enrico Bondi, who was appointed by Monti in May as a special commissioner for the program, will help the government seek another 6 billion euros in savings to cancel the sales tax increase altogether, the Deputy Finance Minister said.

Government Cuts

The package cuts the budget of the central government by 7.5 billion euros through 2014, trims health care and reduces transfers to regions by 2.7 billion euros in the next 2 ½ years. The central and local governments will also have to reduce staff by 10 percent and senior staff by 20 percent. The number of provincial administrations will be trimmed by half to about 50 by the end of 2012. The measure was passed by decree, allowing it to take effect immediately.

“The measures aim at reducing excessive public spending while raising the administrations’ productivity without harming the level of services provided,” Monti told reporters at a press conference.

Italy’s two biggest unions have already threatened to strike over the cuts.

“Protests against this plan may take place, but we hope that the need for a reduction of public spending is a shared goal,” Monti said.

Monti said that the savings will generate 2 billion euros of funds for the reconstruction of the northern region of Emilia Romagna that was hit by two fatal earthquakes in May. The plan will also free up money to cover an additional 1.2 billion euros for 55,000 retirees who were left without a pension after the retirement age was raised in December.

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