Italy reworks austerity package

Government officials have made amendments to Italy’s €45.5bn austerity package in an effort to win back some support following the widespread public disproval of the initial plan in early August.

The Italian government drastically revised its €45.5bn austerity package on 29 August, after Prime Minister Silvio Berlusconi’s initial plan was met with widespread public anger just two weeks earlier.

The revisions included scrapping an extremely unpopular ‘solidarity surcharge’ on high earners and did not feature any details of a rumoured VAT increase.

Italy’s 110 provinces are also to be abolished, while the number of MPs in parliament is to be cut by half. The government also said that it will attempt to clamp down on tax evasion.

The new package is still subject to revisions as it has not been discussed by parliament and has only been reviewed by the commissions in the Senate, the upper chamber in the Italian parliament. The amendments “must be approved by lawmakers within the original time frame and achieve the same overall savings”, the Prime Minister’s office said.

However, the government did not clearly indicate how it would make extra savings in light of the softened package.

The Bank of Italy’s deputy director, Ignazio Visco, said on 30 August that if the budget did not include measures to boost economic growth – which he expects to be less than 1% in 2011 – then it would “inevitably have restrictive effects on the economy”.

“We are risking a phase of stagnation, which would slow the decrease in the debt burden […] Balancing the budget has to be combined with economic policy aimed at reviving prospects for growth in our economy.”

Stefano Fassina, from the opposing Democratic Party, said, "The 'unanimous decisions' from the Arcore summit do not change the severe inequities of the austerity package but further reduce its already weak credibility.”

However, Barclays Capital analyst Fabio Fois said that the revised package “contains some grey areas, though it is not going to alter our view much.”

“We estimate that the possible fiscal slippage (assuming the newest introduced anti-tax evasions do not work at all) would be lower than €3.3bn over three years (2011-2013). As we had already projected that Italy would have hardly met its fiscal target for 2013 (we look for a budget deficit of 0.9% of GDP by that time against the government's estimate of close-to-balance), the estimated possible fiscal slippage is not going to alter our view much,” Fois said.