April 17 (Bloomberg) -- Italy may need as much as 7 billion euros ($9.2 billion) in additional spending cuts this year to meet its goal of bringing the budget deficit within the European Union limit, said Finance Undersecretary Gianfranco Polillo.
“There are additional expenses worth 5 billion euros to 7 billion euros that need to be covered,” Polillo said in an interview in Rome on April 15. These include as much as 600 million euros to finance military operations abroad and about 1.2 billion euros for unemployment programs, he said. Funding the expenses through tax increases would aggravate Italy’s fourth recession since 2001, he said.
Finance Minister Vittorio Grilli reiterated yesterday that the government would reach its goal of trimming its budget deficit to 2.9 percent of gross domestic product this year. The needed spending cuts mentioned by Polillo are the equivalent of about 0.45 percentage point of GDP, and inaction could leave the shortfall above the EU’s 3 percent limit.
“If there is backsliding, we will take corrective action,” Grilli said in parliamentary testimony in Rome.
Polillo’s estimate doesn’t take into account possible changes in the government policies such as a reduction in a property tax introduced by Prime Minister Mario Monti’s government, Polillo said. All political parties promised to cut or abolish the tax during the campaign for February’s inconclusive elections.
Italy is mired in a second month of a political stalemate after the Feb. 24-25 vote failed to produce a majority in Parliament. Still, the yield on the 10-year bond has dropped about 60 basis points since then, as investors shrug off the risks of a prolonged political impasse.
Italy doesn’t need a bailout, though may be a victim of “a domino effect” if Spain were forced to ask for aid, he said. Only a government with full powers would be able to make an aid request. “In general, we need a government able to cope with increasing difficulties as soon a possible,” he said.
Italian bonds should hold on to most of their post-election gains, even if the selection of a new president of the republic starting this week fails to resolve the political impasse, Polillo said.
“Markets understand that a situation of tension over liquidity in the European market doesn’t permit speculative moves,” he said. “I’m convinced that the spread will remain in the range of 300 to 350 basis points.”
The yield on Italy’s 10-year bond fell 5 basis points to 4.27 percent at 9:55 a.m. in Rome, leaving the difference with comparable German bunds at 298 basis points, the lowest since before the election.
Parliament and regional delegates will meet April 18 to elect Italian President Giorgio Napolitano’s successor, a procedure that can take a few days. The new president will play a key role in designating a prime minister candidate to form the next government. Democratic Party leader Pier Luigi Bersani, who won a majority in the Chamber of Deputies but fell short in the Senate in the February vote, failed in his first attempt to to put together government.