Monti Pledges Raft of Tax Cuts After a Year of Increasing Levies

Italian Prime Minister Mario Monti pledged to cut taxes by 30 billion euros ($27 billion) in five years as he campaigns for a second term after a year spent raising levies to fend off the sovereign debt crisis.

Monti proposed 11.5 billion euros in cuts to the IRAP regional corporate tax over five years starting in 2014, 15.5 billion in lower income taxes and 2.5 billion euros in breaks for first-home owners and families with children. Speaking on La7 television, he also pledged to revamp an unpopular property tax his government imposed to make it “more progressive and fair.”

The government can make up for the lower tax revenue through reducing spending, fighting tax evasion and keeping bond yields down, Monti said. He defended his 14-month term in office, during which he overhauled pension and labor laws and raised taxes, saying the measures were needed to keep Italy afloat amid the European sovereign debt crisis.

“I find it consistent to have at first been been very tough and to say now that in the next five years we can afford a different approach,” he said.

The yield premium investors demand to buy Italy’s 10-year bonds over comparable German bonds is at 250 basis points, less than half the level when Monti came to power. Still, austerity measures have deepened Italy’s recession, increasing pledges by candidates to cut taxes to stimulate growth. That spread reached a euro-era high of 575 basis points the week before he came to power in Nov. 2011.

‘A Nightmare’

“Every month it was a nightmare to see how much debt had to be issued,” Monti said, referring to the high bond yields he faced when he became prime minister. “We need to loosen ties gradually,” he said, adding that a shift from current policies too quickly after the Feb. 24-25 vote could hurt the country’s finances.

Monti’s government served with the support of the Democratic Party and former Prime Minister Silvio Belusconi’s People of Liberty, which represent the left and right respectively of Italy’s political spectrum. Now Monti is campaigning against the two political blocs.

Berlusconi, running second in opinion polls, is pushing for the abolition on primary residences of Monti’s property tax known as IMU, while front-runner Bersani has proposed cutting income tax rates on low and middle incomes and raising rates on high earners.

While Bersani leads in national polls, numbers show he may not have enough support to win a majority in both houses of parliament, which may force him to seek an alliance with Monti’s coalition. Bersani, a former communist, draws support from labor unions, while Monti, an ex-Goldman Sachs Group Inc. adviser and European competition commissioner, today defended voting for Berlusconi’s center-right party in 1994, saying it was the best option at the time.

Monti has criticized both parties, saying neither has guaranteed that economic reforms will continue.

“I won’t participate in any government that isn’t sufficiently reformist,” he said.

Before it's here, it's on the Bloomberg Terminal.