Letta Mixes Tax Cut With Rigor in Post-Berlusconi Italy

Italian Prime Minister Enrico Letta is evaluating austerity measures to pay for a promised payroll-tax cut in the 2014 budget, his first major piece of legislation since marginalizing his ally, Silvio Berlusconi.

Letta’s cabinet may discuss reductions to health-care spending, curbs to increases in the richest pensions and a boost to capital gains-tax rates when it meets today in Rome to approve the budget, according to a draft of the plan obtained by Bloomberg News. The budget must then be passed by parliament.

Letta, 47, may have more sway reshaping Italy’s accounts after gaining the upper hand this month on Berlusconi, the billionaire former premier and member of the ruling coalition. The two leaders tussled in the first five months of their partnership, with Letta pushing for budget rigor and measures to stimulate hiring, while Berlusconi insisted on property tax cuts and relief from his criminal convictions.

“There is a genuine change here,” Raffaella Tenconi, an economist at Bank of America Merrill Lynch in London, said in an e-mail. “Less focus on Berlusconi’s specific justice issues frees up resources to focus on the budget and ignite new reform momentum.”

Italian 10-year bond yields rose 2 basis point to 4.27 percent at 10:28 a.m. in Rome. The yields have declined about 15 basis points since Oct. 1, the day before Letta undermined Berlusconi in a parliamentary showdown.

Capital Gains

The capital-gains tax could rise to 22 percent from 20 percent for some assets, according to the draft. State financing for the health-care program will be reduced by 500 million euros ($678 million) next year and 1 billion euros in 2015, according to the draft. Automatic increases to pension benefits will be cut in half for retirees who get five times the minimum stipend.

A spokesman for Letta declined to comment on the contents of the draft. The Finance Ministry said in a statement late yesterday that drafts “in circulation” didn’t match the document that would be presented today. The ministry didn’t give specifics.

The payroll-tax reduction may amount to 5 billion euros or more, Ansa newswire reported yesterday, citing a target given by Industry Minister Flavio Zanonato. That won’t be enough, according to Italian employers lobby Confindustria, whose chairman, Giorgio Squinzi, called for a cut of at least 10 billion euros.

“They won’t be able to muster more than 4 or 5 billion,” said Federico Santi, an analyst with Eurasia Group. “The government will still be constrained by the fiscal side and have limited resources to spend on stimulus.”

Curbs Influence

Italy, where unemployment returned to a record of 12.2 percent in August, has labor taxes among the highest in the European Union, statistics office Eurostat said in a June report. The country had a 42.3 percent implicit tax rate on labor in 2011, Eurostat said. That’s second only to Belgium’s 42.8 percent in the 28-country bloc.

Letta curbed Berlusconi’s influence by winning a confidence vote in parliament on Oct. 2. The 77-year-old Berlusconi, seeking to topple the government, was deserted by senior lawmakers in his own party, who gave their support to Letta.

Berlusconi is facing expulsion proceedings in the Senate because his tax-fraud conviction runs afoul of a 2012 anti-corruption law. He is appealing separate convictions for illegal use of wiretaps, abuse of power and paying a minor for sex. Berlusconi has denied all wrongdoing, saying the trials amount to political persecution.

Letta’s Democratic Party, the biggest force in parliament, needs Berlusconi’s People of Liberty and former Prime Minister Mario Monti’s Civic Choice for a majority in both chambers.

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