Identifier
Created
Classification
Origin
02ROME4053
2002-08-20 07:38:00
CONFIDENTIAL
Embassy Rome
Cable title:  

KEY ECONOMIC POLICY-MAKERS ON GOI BUDGET ISSUES

Tags:  ECON EFIN ELAB IT KPRP 
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C O N F I D E N T I A L ROME 004053 

SIPDIS

E.O. 12958: DECL: 08/19/2007
TAGS: ECON EFIN ELAB EFIN ELAB EFIN ELAB IT KPRP ITECON KPRP ITECON KPRP
SUBJECT: KEY ECONOMIC POLICY-MAKERS ON GOI BUDGET ISSUES

REF: A. A: ROME 2794

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PAGE 02 ROME 04053 01 OF 03 200811Z

B. B: ROME 3551

CLASSIFIED BY: ACTING ECONOMIC COUNSELOR KATHLEEN DOHERTY FOR REASONS 1
.5 (B) AND (D)

C O N F I D E N T I A L ROME 004053

SIPDIS

E.O. 12958: DECL: 08/19/2007
TAGS: ECON EFIN ELAB EFIN ELAB EFIN ELAB IT KPRP ITECON KPRP ITECON KPRP
SUBJECT: KEY ECONOMIC POLICY-MAKERS ON GOI BUDGET ISSUES

REF: A. A: ROME 2794

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PAGE 02 ROME 04053 01 OF 03 200811Z

B. B: ROME 3551

CLASSIFIED BY: ACTING ECONOMIC COUNSELOR KATHLEEN DOHERTY FOR REASONS 1
.5 (B) AND (D)


1. (SBU) SUMMARY. THE BALLOONING PUBLIC DEFICIT IS A MATTER
OF GREAT CONCERN TO THE GOI, SEVERAL KEY ECONOMIC
POLICYMAKERS TOLD ECONOMIC COUNSELOR DURING A SERIES OF
RECENT MEETINGS. DEPUTY FINANCE MINISTER MARIO BALDASSARRI,
FINANCE MINISTRY UNDER SECRETARY VITO TANZI, AND SENIOR
RESEARCHER AT THE BANK OF ITALY DANIELE FRANCO EXPRESSED
CONCERN ABOUT THE PUBLIC DEFICIT, WHICH IS LIKELY TO EXCEED
THE 2002 TARGET OF 1.1 PERCENT. THE GOI FACES MOUNTING
EXPENDITURES FOR HEALTH AND EDUCATION. PENSION AND INTEREST
PAYMENTS CANNOT BE CUT. SECURITY AND DEFENSE COSTS HAVE
PUSHED UP THE DEFICIT. AT THE SAME TIME, THE GLOBAL ECONOMIC
SLOWDOWN HAS PUSHED TAX REVENUES BELOW EXPECTATIONS. FINANCE
MINISTER TREMONTI HAS CHOSEN TO DELAY MEETING STABILITY PACT
TARGETS FOR TWO YEARS TO ENCOURAGE ECONOMIC GROWTH. HE PLANS
TO CUT TAXES AND INVEST IN NEEDED INFRASTRUCTURE, WHILE
EXERTING TOUGH PRESSURE ON OTHER GOVERNMENT SPENDING. END
SUMMARY.

THE GOVERNMENT,S FIRST YEAR
--------------


2. (SBU) THE MEETING WITH BALDASSARRI TOOK PLACE A FEW DAYS
AFTER THE APPROVAL OF THE DPEF, THE 2002-2006 GOI BUDGET
PLAN. BALDASSARRI SAID THAT THE GOI HAD FACED DIFFICULT
ECONOMIC CIRCUMSTANCES IN ITS FIRST YEAR. HE MENTIONED THAT
GOVERNMENT EFFORTS TO JUMP-START ECONOMIC GROWTH HAD BEEN
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PAGE 03 ROME 04053 01 OF 03 200811Z
UNDERMINED BY THE 2001 DEFICIT INHERITED FROM THE PREVIOUS
ADMINISTRATION, USD 18 BILLION DOLLARS LARGER THAN EXPECTED,

AND ECONOMIC REVERBERATIONS FROM SEPT. 11. THE INHERITED
DEFICIT AND THE ECONOMIC SLOWDOWN TOGETHER FORCED FINANCE
MINISTER TREMONTI TO POSTPONE PLANS FOR TAX CUTS.


3. BALDASSARI EXPLAINED THAT THE WORSENING INTERNATIONAL
OUTLOOK FOLLOWING SEPT. 11 SLOWED THE ITALIAN GROWTH RATE
FROM 2.3 PERCENT TO 1.3 PERCENT IN 2001, AND TO THE LIKELY
ONE PERCENT OR LOWER IN 2002. TO STIMULATE GROWTH IN 2003,
THE GOI PLANS TO IMPLEMENT THE FIRST PART OF PLANNED TAX CUTS
-- CUTTING TAXES FOR LOWER INCOME LEVELS.

2002 PUBLIC FINANCE TRENDS
--------------


4. (SBU) ON AUGUST 1, ECONOFFS MET WITH DANIELE FRANCO, CHIEF
OF THE PUBLIC FINANCE DIVISION OF THE RESEARCH DEPARTMENT OF
THE BANK OF ITALY. FRANCO WAS ALSO PESSIMISTIC ABOUT PUBLIC
FINANCE TRENDS IN 2002. THE PUBLIC DEFICIT GREW FASTER IN
THE FIRST HALF OF THIS YEAR THAN IN CORRESPONDING PERIOD LAST
YEAR. THE PUBLIC DEFICIT WAS E31.1 BILLION THROUGH JULY 2002,
UP 29 PERCENT OR 7 BILLION EURO OVER THE CORRESPONDING PERIOD
IN 2001. FRANCO POINTED TO THE SAME PROBLEMS AS HAD THE
FINANCE MINISTRY OFFICIALS -- THE ECONOMIC SLOWDOWN HAD MEANT
LOWER REVENUES, WHILE GOVERNMENT SPENDING HAD EDGED UP,
PARTICULARLY IN THE AREA OF HEALTH CARE. DEEP STRUCTURAL
REFORMS WERE STILL NEEDED -- INCLUDING TAX REFORM AND PENSION
REFORM. FRANCO ADDED THAT THE GOI'S PROBLEMS HAD BEEN
COMPLICATED BY AN EUROSTAT DECISION TO REVISE THE 2001 PUBLIC
DEFICIT FIGURE UPWARDS TO 2.2 PERCENT OF GDP. EUROSTAT HAD
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PAGE 04 ROME 04053 01 OF 03 200811Z
DISAGREED WITH THE GOI'S ACCOUNTING FOR SECURITIZED REVENUES
FROM LOTTERY PROCEEDS AND REAL ESTATE SALES.


5. (SBU) FRANCO NOTED THAT THE GOI HAD GENERATED EURO 50
MILLION TO DATE FROM A MEASURE ALLOWING ITALIANS TO
REPATRIATE CAPITAL HELD OVERSEAS (AND NOT DECLARED FOR TAX
PURPOSES) IN RETURN FOR A ONE-TIME 2.5 PERCENT PENALTY.
NONETHELESS, HE PREDICTED THAT THE 1.1 PERCENT DEFICIT/GDP
TARGET FOR 2002 WOULD BE EXCEEDED.

2003 BUDGET
--------------


6. (SBU) BOTH TANZI AND BALDASSARI STRESSED THAT THE GOI
FACES INTENSE PRESSURE TO BRING THE 2003 BUDGET DEFICIT DOWN.
WHILE FINANCE MINISTER TREMONTI HAD POSTPONED BALANCING THE
BUDGET TO 2005 (FROM 2003),HE REMAINS FIRMLY COMMITTED TO
KEEPING THE DEFICIT TO A MINIMUM. AT THE SAME TIME, TREMONTI
AND PRIME MINISTER BERLUSCONI HAVE PROMISED TAX CUTS AND NEW
INVESTMENT IN INFRASTRUCTURE. GIVEN THESE CONSTRAINTS,
TREMONTI IS SEEKING TO CUT WHEREVER POSSIBLE AND TO CAP
SPENDING IN ALL MINISTRIES.


7. (U) FINANCE U/S TANZI EXPLAINED THAT HE HAD FOUND HIMSELF

CONFIDENTIAL

CONFIDENTIAL PTQ6101

PAGE 01 ROME 04053 02 OF 03 200812Z
ACTION EUR-00

INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 COME-00
CTME-00 INL-00 DODE-00 DOEE-00 DOTE-00 ANHR-00 SRPP-00
EB-00 EXIM-01 E-00 FAAE-00 VC-00 FRB-00 H-01
TEDE-00 INR-00 ITC-01 LAB-01 L-00 VCE-00 MMP-00
AC-01 NSAE-00 NSCE-00 OIG-03 OMB-01 OPIC-01 ACE-00
SP-00 SSO-00 SS-00 STR-00 USIE-00 LBA-00 DRL-02
G-00 NFAT-00 SAS-00 /013W
-------------- DB64DF 200813Z /38
P 200738Z AUG 02
FM AMEMBASSY ROME
TO SECSTATE WASHDC PRIORITY 5459
INFO EU MEMBER STATES COLLECTIVE PRIORITY
AMCONSUL FLORENCE PRIORITY
AMCONSUL FRANKFURT PRIORITY
AMCONSUL MILAN PRIORITY
AMCONSUL NAPLES PRIORITY
DEPT OF TREASURY WASHDC PRIORITY
USEU BRUSSELS PRIORITY 2792
DEPT OF LABOR WASHDC PRIORITY

C O N F I D E N T I A L SECTION 02 OF 03 ROME 004053

SIPDIS

E.O. 12958: DECL: 08/19/2007
TAGS: ECON EFIN ELAB EFIN ELAB EFIN ELAB IT KPRP ITECON KPRP ITECON KPRP
SUBJECT: KEY ECONOMIC POLICY-MAKERS ON GOI BUDGET ISSUES

FAR MORE CONSTRAINED THAN HE HAD EXPECTED IN CUTTING
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PAGE 02 ROME 04053 02 OF 03 200812Z
GOVERNMENT SPENDING. MUCH OF THE SPENDING SIMPLY CANNOT BE
CUT. POST-SEPTEMBER 11 SECURITY SPENDING AND MILITARY
SPENDING FOR OPERATION ENDURING FREEDOM HAD BEEN COSTLY, BUT
ESSENTIAL. PENSION PAYMENTS ABSORB A TOTAL 18 PERCENT OF THE
BUDGET, HEALTH SPENDING SIX PERCENT, EDUCATION AND OTHER
SOCIAL SPENDING 12 PERCENT AND INTEREST ON ITALY,S FOREIGN
DEBT ANOTHER 13 PERCENT.


8. (U) THE HEALTH SECTOR REFORM, ADOPTED IN LATE 2001 AS PART
OF ITALY'S DEVOLUTION OF AUTHORITY TO THE REGIONAL
GOVERNMENTS, HAS NOT CONTAINED GOVERNMENT HEALTH SPENDING AS
PREDICTED. WHEN MANAGEMENT OF HEALTH CAR WAS DEVOLVED TO THE
REGIONAL GOVERNMENTS, ALONG WITH THE FUNDING, TOTAL
EXPENDITURES WERE CAPPED AT 6 PERCENT OF GDP. HOWEVER, THE
REGIONS HAVE (PARTICULARLY IN THE SOUTH) SPENT MORE THAN
ALLOWED. THE GOI IS LEGALLY FORBIDDEN TO SIMPLY DENY HEALTH
CARE TO ITALIAN CITIZENS, AND THUS MUST PROVIDE THE
ADDITIONAL FUNDING REQUIRED. THE 2003 BUDGET LAW WILL,
THEREFORE, HAVE TO INCLUDE ADDITIONAL FUNDING FOR HEALTH
CARE. TANZI NOTED THAT THE RISING COST OF HEALTH IS ONE OF
THE MOST SERIOUS CONCERNS TO THE FINANCE MINISTRY.


9. (U) THE 2003 BUDGET IS TIGHT, NOTED BALDASSARI, BUT
INCLUDES SEVERAL ELEMENTS INTENDED TO SPUR ECONOMIC GROWTH.


A. IMPLEMENTATION OF THE FIRST TRANCHE OF THE TAX REFORM,
WHICH WILL BENEFIT LOWER INCOME FAMILIES, WHO ALSO ARE THOSE
MOST AFFECTED BY THE PRICE INCREASES RELATED TO THE EURO
CHANGEOVER. (DANIELE FRANCO OF THE BOI PREDICTED THAT THIS
FIRST ROUND OF TAX CUTS WOULD COST SLIGHTLY OVER ONE PERCENT
OF GDP.)
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PAGE 03 ROME 04053 02 OF 03 200812Z


B. A LABOR PACT MADE WITH EMPLOYERS, REPRESENTATIVES AND THE
MAIN TRADE UNION CONFEDERATIONS. (NOTE: THE PACT DOES NOT
INCLUDE CGIL, THE LARGEST UNION IN TERMS OF MEMBERSHIP AND
WHICH OPTED OUT OF THE PACT.) THE MOST IMPORTANT MEASURES OF
THE PACT ARE THE 36-MONTH SUSPENSION OF ARTICLE 18 OF THE
LABOR STATUTE FOR THOSE NEWLY HIRED IN COMPANIES WITH FEWER
THAN 15 WORKERS, AND AN EXTENDED PAYMENT PERIOD OF
UNEMPLOYMENT BENEFITS. (REF A PROVIDES BACKGROUND ON ARTICLE
18 AND THE LABOR PACT.)


C. IMPLEMENTATION OF AN AMBITIOUS INFRASTRUCTURE INVESTMENT
PROGRAM (SEE PARA 12).


10. (SBU) BALDASSARRI SAID THAT THE FINANCE MINISTRY HAS
REDUCED ITS OWN COSTS FOR PROCURING GOODS AND SERVICES BY
ONE-THIRD IN 2002, BY CREATING "CONSIP", WHICH HAS
IMPLEMENTED A PROGRAM OF ON-LINE PURCHASING. IN 2003, THE
GOI WILL EXPAND ON-LINE PURCHASES OF GOODS AND SERVICES,
THROUGH CONSIP, WHICH IS EXPECTED TO REDUCE THESE
EXPENDITURES BY AT LEAST 10 PERCENT -- A SAVINGS OF 40-50
MILLION EURO.

A NEW TAX? AN AMNESTY?
--------------


11. (C) U/S TANZI (PROTECT) MENTIONED THAT THERE WERE TWO
MORE MEASURES UNDER SERIOUS CONSIDERATION FOR THE 2003
BUDGET: A ONE-TIME TAX AND A TAX AMNESTY. TANZI SAW PROBLEMS
WITH BOTH. A ONE-TIME TAX WOULD RAISE SOME REVENUE, BUT
WOULD BE AN UNPOPULAR MEASURE. IT WOULD BE HARSHLY
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PAGE 04 ROME 04053 02 OF 03 200812Z
CRITICIZED AS A BREAKING OF PRIME MINISTER BERLUSCONI'S
PROMISE TO CUT TAXES. THE PROPOSED AMNESTY FOR TAX EVADERS
(PERMITTING THEM TO PAY A ONE-TIME PENALTY AND RETURN TO THE
TAX SYSTEM) WOULD, IN TANZI'S OPINION, BE EVEN WORSE. TAX
PARDONS, HE ARGUED, ARE NEGATIVE BECAUSE THEY CREATE
EXPECTATIONS FOR FURTHER TAX PARDONS IN THE FUTURE AND LEAD
TO FURTHER EVASION. MOREOVER, THEY ANGER LAW-ABIDING
TAXPAYERS.

INFRASTRUCTURE
--------------


12. (SBU) THE 2003 BUDGET WILL INCLUDE AN INVESTMENT PROGRAM
FOR PUBLIC SECTOR INFRASTRUCTURE ) ROADS PRIMARILY. TANZI
ACKNOWLEDGED THAT IMPROVEMENTS IN INFRASTRUCTURE ARE A
LONG-TERM GOI PROJECT; IN THE SHORT TERM, NO EFFECT ON GDP
GROWTH IS EXPECTED.


13. (SBU) DEPUTY MINISTER BALDASSARRI BELIEVES THAT THE GOI'S
NEWLY CREATED COMPANY, INFRASTRUTTURE S.P.A., WILL ENSURE
THAT INFRASTRUCTURE PROJECTS ARE DONE IMPLEMENTED ACCORDING
TO PRIORITY AND ON A TIMELY BASIS. INFRASTRUTTURE S.P.A. WILL
HELP FINANCE INFRASTRUCTURE AND PUBLIC WORK PROJECTS BY
ISSUING BONDS. BALDASSARI DOWNPLAYED THE IMPACT ON THE PUBLIC

CONFIDENTIAL

CONFIDENTIAL PTQ6103

PAGE 01 ROME 04053 03 OF 03 200812Z
ACTION EUR-00

INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 COME-00
CTME-00 DODE-00 DOEE-00 DOTE-00 ANHR-00 SRPP-00 EB-00
EXIM-01 E-00 FAAE-00 VC-00 FRB-00 H-01 TEDE-00
INR-00 ITC-01 LAB-01 L-00 VCE-00 MMP-00 AC-01
NSAE-00 NSCE-00 OIG-03 OMB-01 OPIC-01 ACE-00 SP-00
SSO-00 SS-00 STR-00 USIE-00 LBA-00 DRL-02 G-00
NFAT-00 SAS-00 /013W
-------------- DB64E3 200813Z /38
P 200738Z AUG 02
FM AMEMBASSY ROME
TO SECSTATE WASHDC PRIORITY 5460
INFO EU MEMBER STATES COLLECTIVE PRIORITY
AMCONSUL FLORENCE PRIORITY
AMCONSUL FRANKFURT PRIORITY
AMCONSUL MILAN PRIORITY
AMCONSUL NAPLES PRIORITY
DEPT OF TREASURY WASHDC PRIORITY
USEU BRUSSELS PRIORITY 2793
DEPT OF LABOR WASHDC PRIORITY

C O N F I D E N T I A L SECTION 03 OF 03 ROME 004053

SIPDIS

E.O. 12958: DECL: 08/19/2007
TAGS: ECON EFIN ELAB EFIN ELAB EFIN ELAB IT KPRP ITECON KPRP ITECON KPRP
SUBJECT: KEY ECONOMIC POLICY-MAKERS ON GOI BUDGET ISSUES

DEFICIT. SOME BONDS ARE EXPECTED TO BE BACKED BY THE SALE OF
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PAGE 02 ROME 04053 03 OF 03 200812Z
GOI REAL ESTATE. THE GOI HOPES THAT SUCH SALES WILL GENERATE
INCOME EQUAL TO FIVE PERCENT OF GDP.


14. (U) THE BOI'S FRANCO NOTED THAT THE BUDGET DOCUMENT DPEF
2003-2006 ASSUMES INVESTMENT IN INFRASTRUCTURE WILL EQUAL
FIVE PERCENT OF GDP EACH YEAR. FRANCO DOUBTS THAT GOI WILL
BE ABLE TO FINANCE THIS LEVEL OF INFRASTRUCTURE INVESTMENT
FROM PRIVATE FINANCING ALONE.

PRIVATIZATIONS
--------------


15. (U) ACCORDING TO BALDASSARI, THE BERLUSCONI GOVERNMENT
PLANS TO ACCELERATE PRIVATIZATIONS DURING 2003, IF MARKET
CONDITIONS IMPROVE. THE FIRST TO BE SOLD WILL BE THE GOI'S
TOBACCO MANUFACTURING COMPANY ETI. FURTHER ASSETS OF THE GOI
ELECTRICITY COMPANY ENEL WILL ALSO BE AUCTIONED IN 2003. THE
GOI INTENDS TO SELL ALL BUT 30 PERCENT OF ENEL AND THE
HYDROCARBONS FIRM ENI. BALDASSARI SAID THAT THERE WERE PLANS
TO SELL OFF THE GOI'S RAILWAYS AND THE POSTAL SERVICE, BUT
NOT IN THE NEAR TERM. HE ADDED THAT THERE ARE NO PLANS TO
PRIVATIZE THE NATIONAL TV NETWORK, RAI.

COMMENT
--------------


16. (SBU) THE GOI'S EXPERT FINANCE MINISTRY TEAM IS CLEARLY
CONCERNED OVER THE FISCAL OUTLOOK. NONETHELESS, FINANCE
MINISTER TREMONTI HAS CHOSEN TO MOVE AHEAD WITH ESSENTIAL
INFRASTRUCTURE INVESTMENT AND TAX CUTS. WHILE THIS MAY DELAY
ELIMINATION OF ITALY'S FISCAL DEFICIT, IT IS ESSENTIAL TO THE
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PAGE 03 ROME 04053 03 OF 03 200812Z
ECONOMIC GROWTH OF THE COUNTRY. TREMONTI'S CREDIBILITY AND
COMPETENCE ARE THE KEY ASSETS OF THE GOI AS IT FACES THE
ECONOMIC STORMS AHEAD.
SKODON

CONFIDENTIAL

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2002ROME04053 - Classification: CONFIDENTIAL