Italian government approves new austerity cuts

By Frances D'emilio

Associated Press

Published: Friday, Aug. 12 2011 12:00 a.m. MDT

Italian Premier Silvio Berlusconi, right, and Finance Minister Giulio Tremonti leave at the end of a press conference, in Rome, Friday, Aug. 12, 2011. Italy's government has approved €45 billion ($64.12 billion) in cuts over the next two years to balance the budget by 2013 to meet demands of European Central Bank.

Riccardo De Luca, Associated Press

Enlarge photo»

ROME — Italy's government approved €45.5 billion ($64.84 billion) Friday in emergency austerity measures over two years to balance the budget by 2013 in response to demands by the European Central Bank.

The Cabinet approved the package of cuts and new taxes despite fierce resistance from local government officials, who denounced the measures as socially unjust and as damaging to economic growth.

"It wasn't easy. We're personally pained to have taken these measures, but we are satisfied," Premier Silvio Berlusconi told a news conference after feverish talks with the opposition, regional governors and big city mayors.

The measures were whipped together in response to the ECB, which demanded a balanced budget a year earlier than anticipated as well as structural reforms to promote growth.

The Cabinet approved €20 billion in cuts for 2012 and €25.5 billion for 2013.

The measures include an extraordinary "solidarity" tax for high-earners. Anyone with an income over €90,000 a year will be assessed an additional 5 percent tax in each of the next two years. The rate will be 10 percent for incomes over €150,000.

"Our hearts are bleeding. This government had bragged that it never put its hands in the pockets of Italians but the world situation changed," Berlusconi said, while insisting the emergency measures were "fair."

The solidarity tax was reminiscent of another by former Premier Giulio Amato, who in July 1992 siphoned money out of every Italian bank account at a rate of 6 lire per 1,000 lire as the old Italian currency faced collapse. Just months later, Italy abandoned the European currency system and allowed the lira's value to be dictated by market forces during a period of intense currency speculation.

Berlusconi's "solidarity" tax could encourage greater tax evasion, as those who don't draw a declared salary from an employer would be tempted to hide income through cash payments to avoid the levy.

Berlusconi held urgent meetings with key parties to pass the cuts before a long holiday weekend, when most of the country shuts down.

But the hasty news conference by regional, provincial and city authorities held after the meeting with Berlusconi and his finance minister, Giulio Tremonti, did not bode well for broad acceptance for new sacrifices.

The proposed cuts to such critical services as local transportation and welfare would have "a depressive ... effect," hurting most the underclasses and inhibiting the productive north of contributing to national GDP, Roberto Formigoni, the governor of the northern Lombardy state, told reporters.

Rome passed a €70 billion ($99 billion) austerity package last month, but the government has said the financial situation has deteriorated significantly since then and is seeking new measures.

Under intense pressure from the European Central Bank and eurozone political leaders, the government agreed to bring forward its goal of balancing the budget to 2013 instead of 2014 as originally planned, and to come up with structural reforms that stimulate investment and growth.

In exchange, the ECB has been buying Italian bonds on the secondary market to hold down borrowing costs threatening to topple Italy's notoriously high public debt.

Local administrations were being asked to cut €6 billion ($8.55 billion) in spending next year, Formigoni said. That's from total additional proposed cuts of €20 billion in 2012. Austerity measures in 2103 would total €25 billion.

Formigoni and other officials want to draft alternatives to the government cuts. Formigoni said that Lombardy, one of Italy's most economically productive regions, would see its GDP suffer — which in turn would hurt national growth.

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