Letta Reshapes Italy Austerity With Tax Cut, Spending Curbs

Italian Prime Minister Enrico Letta reshaped the country’s two-year commitment to austerity by approving a labor-tax cut and relying on 3.5 billion euros ($4.7 billion) of spending reductions to meet 2014 deficit targets.

The central government will bear 2.5 billion euros of the cuts and regional administrations will deliver 1 billion euros, Letta told a news conference in Rome after his cabinet approved next year’s budget yesterday. The labor-tax reduction will give an extra 1.5 billion euros to workers next year and a total of 5 billion euros through 2016, he said. Companies will get tax breaks of 5.6 billion euros in that span.

Letta, Italy’s third premier since 2011, is shifting the burden to government bureaucracy from taxpayers in a bid to spur the stagnant economy as deficit cutting continues. Public-administration spending rose 0.6 percent in nominal terms last year to 801 billion euros as Letta’s predecessor, Mario Monti, counted mainly on tax increases to strengthen the budget and shield Italy from bond-market speculation.

The budget “further indicates a shift from a focus on taxation to spending cuts,” Riccardo Barbieri, chief European economist at Mizuho International Plc in London, said in a research report today.

Bond Yields

Italian 10-year bond yields were unchanged at 4.25 percent at 11:11 a.m. in Rome. That’s down from more than 7 percent in late 2011.

Letta, 47, is continuing the austerity drive that began in earnest in mid-2011 with an intensification of the European debt crisis. The then prime minister, Silvio Berlusconi, set deficit-reduction goals before being forced out in November that year. Under Monti, the value-added tax and gasoline levies rose, while a new property tax was created.

While VAT increased under Letta on Oct. 1 to 22 percent from 21 percent, the premier said yesterday he’s focused on easing fiscal pressure in the long term. Italy’s tax burden will fall to 43.3 percent in 2016 from 44.3 percent, Letta said.

“I’m sure that actions like these will bring Italy out of its very long recession,” Finance Minister Fabrizio Saccomanni said at the news conference. The economy will be “brought to a level of sustainable growth of around 2 percent,” he said.

Italian Growth

Italy, in recession since 2011, had real growth of 2.2 percent in 2006, the only year since 2001 that economic expansion exceeded 2 percent, according to Bloomberg data.

The budget measures next year total 11.6 billion euros, including 3.7 billion euros in tax cuts, 600 million euros for the temporary layoff program and 300 million euros for earthquake reconstruction, the government said in a statement. To help pay for the measures, resources of 8.6 billion euros were identified, including the 3.5 billion euros of spending reductions and 500 million euros of property sales.

The government said last month it plans to reduce the deficit to 2.5 percent of gross domestic product in 2014 from its target of 3 percent this year. Italy’s 2 trillion-euro debt is about 130 percent of GDP, the second-highest ratio behind Greece in Europe.

“A decrease in labor costs will be positive but this is not the Italian problem,” Romano Prodi, a two-time Italian prime minister, said in an interview. “The problem is bureaucracy, the anti-business behavior of the public administration.”

IMF Recruit

Letta’s push for further spending reductions will be spearheaded by Carlo Cottarelli, who was hired by the government this month from the International Monetary Fund. He is scheduled to leave the IMF on Oct. 22 and assume the job of commissioner for public-spending reform for the Italian government.

Italy’s 1.6 trillion-euro economy, the third-biggest in the euro area, has contracted for eight straight quarters as the tax increases have curbed spending and investment. Letta, who leads a makeshift three-party coalition, has said his priority is to deliver on budget targets while bringing unemployment down from a record 12.2 percent.

Letta is taking greater control of his government’s policy as he consolidates his authority among his allies. He undermined Berlusconi, head of the coalition’s second-biggest party, in an Oct. 2 showdown that boosted Letta’s control over the government agenda. It was Berlusconi, 77, who pushed in August for a property-tax cut that was, at the time, the government’s biggest fiscal measure.

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