Italy: A Quick Kick from Tax Cuts

The ruling center-left government of Prime Minister Giuliano Amato got a political boost from recent economic data. Growth at the end of 2000 was much stronger than expected, and the 2001 outlook is buoyed by sizable tax cuts and improving job markets.

Data on fourth-quarter real gross domestic product showed a 0.8% gain from the third quarter. The rise was double expectations, given the quarter's fewer working days.

The advance lifted 2000 growth to 2.8%, matching the government's target and doubling the 1.4% pace of 1999, when Italy was the euro zone's growth laggard. The annual showing was the best in five years. The plus for Amato is that he faces general elections in either April or May. Currently, he trails the center-right coalition of Silvio Berlusconi in the polls.

The strong yearend showing puts annual growth in 2001 at a higher starting point than expected. Giving growth an extra kick are the tax cuts for households and businesses totaling a large 1.3% of GDP. Some of those took effect in the final quarter of 2000 in the form of rebates.

Indeed, domestic demand led the quarter's growth, including hefty contributions from business investment and private consumption. That pattern was also evident in the strong December expansion in industrial production, the largest since May.

The mix of tax cuts, job gains, faster wage growth, and low inflation will help to offset some of the expected slowdown coming as a result of weaker growth in the U.S. Economists project Italy to expand 2.5% in 2001, with inflation at 2.3%. That growth pace should allow the 10% jobless rate to keep edging lower, helped by increased labor market flexibility.

Amato's tax cuts are aimed at relieving some of the fiscal sacrifices that were required prior to the introduction of the euro. European Union finance ministers recently cautioned Italy on its fiscal discipline, but the government says economic growth and efforts to reduce tax evasion will allow the country to meet its future deficit targets.

By James C. Cooper & Kathleen Madigan

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