Identifier
Created
Classification
Origin
02ROME5049
2002-10-17 07:28:00
CONFIDENTIAL
Embassy Rome
Cable title:  

THE 2003 BUDGET (PART I): A TIGHTROPE WALK

Tags:  ECON EFIN PGOV EUN 
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C O N F I D E N T I A L SECTION 01 OF 04 ROME 005049 

SIPDIS

TREASURY FOR CAROL CARNES

E.O. 12958: DECL: 10/17/2012
TAGS: ECON EFIN PGOV EFIN PGOV EFIN PGOV EFIN PGOV EUN
SUBJECT: THE 2003 BUDGET (PART I): A TIGHTROPE WALK


CLASSIFIED BY: ECONOMIC MINISTER COUNSELOR SCOTT KILNER FOR REASONS 1.5
(B) AND (D)

C O N F I D E N T I A L SECTION 01 OF 04 ROME 005049

SIPDIS

TREASURY FOR CAROL CARNES

E.O. 12958: DECL: 10/17/2012
TAGS: ECON EFIN PGOV EFIN PGOV EFIN PGOV EFIN PGOV EUN
SUBJECT: THE 2003 BUDGET (PART I): A TIGHTROPE WALK


CLASSIFIED BY: ECONOMIC MINISTER COUNSELOR SCOTT KILNER FOR REASONS 1.5
(B) AND (D)


1. (U) THIS IS THE FIRST OF A TWO-PART SERIES ON THE ITALIAN
BUDGET.


2. (C) SUMMARY: A DIVIDED ITALIAN CABINET, AFTER AN ALL-NIGHT
DEBATE, HAS AGREED UPON AND SENT TO PARLIAMENT THE HIGHLY
CONTROVERSIAL 2003 BUDGET. THE BERLUSCONI GOVERNMENT'S BUDGET
IS AN ATTEMPT TO PROMOTE ECONOMIC GROWTH AND FULFILL CAMPAIGN
PROMISES, WHILE CUTTING SPENDING WHEREVER POSSIBLE. THE
RESULT IS A BUDGET DIVIDED BETWEEN TARGETED TAX CUTS AND
INFRASTRUCTURE INVESTMENT ON ONE HAND AND SPENDING CUTS AND
CAPS FOR MINISTRIES, REGIONAL AND MUNICIPAL GOVERNMENTS ON
THE OTHER. SENIOR GOI OFFICIALS HAVE ASSURED US THAT DEFENSE
MINISTRY CUTS WILL NOT MEAN CUTS IN PROCUREMENT FROM U.S.
DEFENSE FIRMS. FINANCE MINISTER TREMONTI WAS THE MAIN
ARCHITECT OF THE 2003 BUDGET AND WILL BE ITS KEY DEFENDER IN
PARLIAMENT. IF THE BUDGET DEFICIT IS HIGHER THAN THE 1.5
PERCENT PREDICTED, WHICH MANY ECONOMISTS SAY IS LIKELY, THEN
TREMONTI WILL NEED TO FIND ADDITIONAL RESOURCES OR FURTHER
SPENDING CUTS. ON THIS TIGHTROPE, THE FINANCE MINISTER'S
REPUTATION -- AND IN NO SMALL MEASURE THAT OF PRIME MINISTER
BERLUSCONI -- LIES IN THE BALANCE.


3. (SBU) PARLIAMENT MUST PASS THE BUDGET BY THE END OF
DECEMBER. THE
CENTER-LEFT IN PARLIAMENT, INDUSTRIALISTS AND UNIONS ARE
FINDING COMMON GROUND IN THEIR OPPOSITION TO THE
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BELT-TIGHTENING MEASURES PROPOSED BY THE GOVERNMENT. IN
CONTRAST, SOME NATIONAL FIGURES ARGUE THAT THE GOVERNMENT
SHOULD HAVE ENACTED PROMISED STRUCTURAL REFORMS BY NOW AND
TRIMMED MORE FAT OFF THE BUDGET. THIS CABLE LOOKS AT THE

BREWING BUDGET BATTLE, THE POTENTIAL WINNERS AND LOSERS, AND
THE IMPLICATIONS FOR THE BERLUSCONI GOVERNMENT. (SEPTEL WILL
PROVIDE SPECIFIC DETAILS ON THE BUDGET.) END SUMMARY.

THE DRAFT 2003 BUDGET
--------------


4. (SBU) ON OCTOBER 2, THE GOI PRESENTED ITS 2003 BUDGET TO
PARLIAMENT, TOTALING E619 BILLION (47.4 PERCENT OF GDP) IN
SPENDING. THE PLAN INCLUDES E20 BILLION IN PLANNED SPENDING
CUTS, PARTIALLY OFFSET BY TAX CUTS OF E7.5 BILLION TO
ENCOURAGE ECONOMIC GROWTH. AMONG THE REVENUE GENERATING
MEASURES ARE PLANNED SALES OF STATE ASSETS, WITH A POTENTIAL
PAYOFF OF E4 BILLION, AS WELL AS A TAX AMNESTY, WHICH COULD
RAISE AS MUCH AS E8 BILLION.

THE ARCHITECTS
--------------


5. (SBU) PRIME MINISTER BERLUSCONI AND FINANCE MINISTER
TREMONTI AGREED ON THE DIFFICULT FRAMEWORK FOR THE BUDGET:
CUT TAXES AND LAUNCH AN INFRASTRUCTURE INVESTMENT PROGRAM, AS
PROMISED DURING THE 2001 CAMPAIGN; CUT SPENDING BUT WITHOUT
ANGERING KEY CONSTITUENCIES; AND AVOID VIOLATING STABILITY
PACT TARGETS.


6. (SBU) ACHIEVING A BALANCE BETWEEN THESE COMPETING AND
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PAGE 04 ROME 05049 01 OF 04 170810Z
OFTEN CONFLICTING GOALS PROVED CHALLENGING IN THE EXTREME.
FINANCE MINISTER TREMONTI AND HIS ECONOMIC TEAM HAVE CHOSEN A
PATH THAT COMBINES CUTTING AND CAPPING SPENDING, WHERE
POSSIBLE, WITH TAX AMNESTIES TO BRING IN ONE-TIME REVENUES.
FINANCE MINISTRY OFFICIALS ARE COUNTING ON A GLOBAL ECONOMIC
RECOVERY IN LATE 2003 TO RAISE TAX REVENUES, BOLSTER THE
PRICE OF STATE-OWNED ASSETS, AND ENCOURAGE INVESTMENT.


7. (C) COMMENT: WHILE TREMONTI WAS THE ARCHITECT OF THIS
BUDGET, AND OF THE ENTIRE BERLUSCONI ECONOMIC PLAN, HE HAS
SURROUNDED HIMSELF WITH A HAND-PICKED CADRE OF LIEUTENANTS,
MANY OF WHOM REPLACED LONG-TIME SENIOR CIVIL SERVANTS. AMONG
THE COTERIE ARE DOMENICO SINISCALCO, FINANCE MINISTRY
DIRECTOR GENERAL (REPLACED MARIO DRAGHI, WHO HAD HELD THIS
POSITION FOR NEARLY A DECADE); DEPUTY FINANCE MINISTER
ANTONIO BALDASSARI; UNDER SECRETARIES VITO TANZI AND GIUSEPPE
VEGAS; DIRECTOR GENERAL FOR ACCOUNTING VITTORIO GRILLI (THE
GOI EQUIVALENT OF THE OMB DIRECTOR) AND VINCENZO FORTUNATO,
CHIEF OF CABINET. THE SUCCESS OR FAILURE OF THE 2003 BUDGET
-- ECONOMICALLY AND POLITICALLY WILL REFLECT STRONGLY ON THIS
TEAM. END COMMENT

THE "LOSING SIDE"
--------------

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CONFIDENTIAL PTQ8396

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ACTION EUR-00

INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 COME-00
CTME-00 DODE-00 DOTE-00 SRPP-00 DS-00 EB-00 EXIM-01
E-00 FAAE-00 VC-00 FRB-00 H-01 TEDE-00 INR-00
ITC-01 L-00 VCE-00 AC-01 NSAE-00 OMB-01 OPIC-01
PA-00 PM-00 PRS-00 ACE-00 P-00 SCT-00 SP-00
IRM-00 SSO-00 STR-00 USIE-00 PMB-00 DSCC-00 PRM-00
DRL-02 G-00 NFAT-00 SAS-00 /009W
-------------- F8E2B5 170811Z /38
P 170728Z OCT 02
FM AMEMBASSY ROME
TO SECSTATE WASHDC PRIORITY 6349
INFO EU MEMBER STATES COLLECTIVE PRIORITY
NATO EU COLLECTIVE PRIORITY
AMCONSUL FLORENCE PRIORITY
AMCONSUL FRANKFURT PRIORITY
AMCONSUL MILAN PRIORITY
AMCONSUL NAPLES PRIORITY
DEPT OF TREASURY WASHDC PRIORITY
NSC WASHDC PRIORITY
USDAO ROME IT PRIORITY

C O N F I D E N T I A L SECTION 02 OF 04 ROME 005049

SIPDIS

TREASURY FOR CAROL CARNES

E.O. 12958: DECL: 10/17/2012
TAGS: ECON EFIN PGOV EFIN PGOV EFIN PGOV EFIN PGOV EUN
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PAGE 02 ROME 05049 02 OF 04 170811Z
SUBJECT: THE 2003 BUDGET (PART I): A TIGHTROPE WALK


8. (SBU) TAXPAYERS: ON TAX CUTS, THE BUDGET PROPOSES A
REDUCTION IN PERSONAL INCOME TAX THAT WILL BENEFIT LOW-INCOME
FAMILIES. WHILE THIS MAY SATISFY SOME VOTERS, MOST ITALIANS
WILL NOT BENEFIT. DURING THE 2001 CAMPAIGN, THEN-CANDIDATE
BERLUSCONI PROMISED FUNDAMENTAL REFORM OF THE TAX SYSTEM,
INCLUDING ELIMINATION OF THE COMPLEX NETWORK OF OVERLAPPING
TAX LEVIES. TREMONTI HAS NOW DESIGNED A NEW STRUCTURE: A
HIGHER MINIMUM INCOME BEFORE TAXES, AND TWO TAX BRACKETS --
23 PERCENT BELOW E100,000 INCOME AND 33 PERCENT OVER THAT
LEVEL. TOP TAX RATES FOR THE HIGHEST INCOME GROUP WOULD
HAVE FALLEN FROM 42.5 PERCENT TO 33 PERCENT; FOR
MIDDLE-INCOME GROUPS, FROM A MAXIMUM RATE OF 39 PERCENT TO 23
PERCENT. GLOBAL ECONOMIC CONDITIONS FORCED THE GOI TO
POSTPONE THIS REFORM UNTIL 2003. NOW, IF APPROVED BY
PARLIAMENT, THE NEW INCOME TAX RATES WILL NOT KICK IN BEFORE
2004 AT THE EARLIEST.


9. (C) THE MINISTRIES: THE 2003 BUDGET PROPOSES A 10 PERCENT
SPENDING CUT IN DISCRETIONARY FUNDS FOR ALL GOVERNMENT
MINISTRIES. FINANCE DEPUTY SECRETARY BALDASSARI TOLD US THAT
THE GOVERNMENT HOPES TO ACHIEVE SUBSTANTIAL SAVINGS POSSIBLE
BY SWITCHING TO ON-LINE PURCHASING. FINANCE UNDER SECRETARY
TANZI TOLD US ON SEPTEMBER 30 THAT A E35 BILLION
DISCRETIONARY FUND FOR THE NON-BINDING PURCHASE OF CAPITAL
GOODS AND SERVICES, SUCH AS TELECOMMUNICATIONS UPGRADES,
WOULD BE CUT. PUBLIC SECTOR HIRING WILL BE FROZEN. NOT
SURPRISINGLY, MINISTERS ALREADY ARE
JOCKEYING TO ENSURE THAT THEIR MINISTRIES TAKE LESS OF A HIT,
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PAGE 03 ROME 05049 02 OF 04 170811Z
AND THAT FAVORED PROGRAMS ARE PRESERVED AND REMAIN UNDER
THEIR CONTROL. IN THE DAYS BEFORE THE CABINET DEBATE ON THE
BUDGET, MINISTER OF PRODUCTIVE ACTIVITIES (MPA) MARZANO
THREATENED TO RESIGN IF HIS MINISTRY DID NOT RETAIN CONTROL
OVER A SPECIAL FUND FOR THE MEZZOGIORNO, ITALY'S SOUTHERN
REGION. NEVERTHELESS, UNDER THE 2003 BUDGET, CONTROL OF THIS
FUND, INTENDED TO PROMOTE INDUSTRIAL DEVELOPMENT IN THE
SOUTH, WILL BE GIVEN
TO THE FINANCE MINISTRY, NOT THE MPA. (COMMENT: MARZANO DID
NOT RESIGN BUT TOLD US CANDIDLY THAT FUNDING FOR THE
MEZZOGIORNO WILL FALL SHORT OF WHAT HE WANTED TO SEE. END
COMMENT.)


10. (SBU) THE DRAFT BUDGET PROPOSES LOWER DEFENSE SPENDING IN
REAL TERMS. DESPITE A MODEST 0.3 PERCENT NOMINAL INCREASE IN
DEFENSE
SPENDING, FROM E19.5 BILLION TO E19.6 BILLION, PREDICTED 2003
INFLATION OF 1.9 PERCENT WOULD MEAN A CUT OF ALMOST 1.6
PERCENT IN REAL SPENDING. THE BUDGET FOR "PERSONNEL,
OPERATIONS AND CAPITAL", FOR THE ARMY, NAVY AND AIR FORCE, IS
TO BE CUT BY AN ESTIMATED 1.4 PERCENT. DEFENSE MINISTRY
CONTACTS ARE CONCERNED THAT PERSONNEL COSTS WILL EAT UP A
LARGE PART OF THE BUDGET, AS THE MILITARY MOVES FROM A
CONSCRIPT FORCE TO A PROFESSIONAL AND MORE HIGHLY-PAID FORCE.
DESPITE THE COMPETING DEMANDS, FINANCE UNDER SECRETARY TANZI
TOLD US THAT DEFENSE PROCUREMENT WITH THE U.S. SHOULD NOT BE
HARMED. NOTE: ITALY HAS SIGNED ON FOR A USD ONE BILLION
INVESTMENT IN THE JOINT STRIKE FIGHTER, AND HAS COMMITTED TO
SEVERAL OTHER MAJOR PROCUREMENTS FROM THE U.S. END NOTE.


11. (C) DESPITE TANZI'S REMARKS, WE HAVE HEARD RAMPANT
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SPECULATION THAT DEFENSE PROCUREMENT IN FACT WILL BE
AFFECTED. ACCORDING TO ITALY'S LEADING DAILY, IL CORRIERE
DELLA SERA, THERE WAS A HEATED EXCHANGE BETWEEN DEFENSE
MINISTER MARTINO AND PM BERLUSCONI DURING THE CABINET DEBATE
ON THE BUDGET. SPECIFICALLY REFERRING TO ITALY'S STANDING
ORDER OF 121 EUROFIGHTER AIRCRAFT AT AN ESTIMATED COST OF
E719 MILLION,
MARTINO REPORTEDLY TOLD THE PM THAT "DEFENSE TODAY MEASURES
THE INTERNATIONAL CREDIBILITY OF OUR COUNTRY. NATO IS CALLING
FOR INCREASING INVOLVEMENT AND COMMITMENT. EUROPE IS PRESSING
FOR THE CREATION OF A TASK FORCE. YOU AND I WILL HAVE TO MEET
AND FACE OUR ALLIES AT THE PRAGUE NATO SUMMIT." MARTINO HAS
PUBLICLY STATED THAT ITALY WILL FULFILL ITS COMMITMENT TO BUY
THE EUROFIGHTERS, AT THE COST OF ALMOST ONE-QUARTER OF ITS
DEFENSE BUDGET OVER THE NEXT TEN YEARS.

-- (C) COMMENT: DEFENSE PROCUREMENT IS FUNDED THROUGH
MULTIPLE APPROPRIATIONS, INCLUDING THOSE FOR THE MINISTRY OF
PRODUCTIVE ACTIVITIES. DEFMIN MARTINO IS IN FACT TRYING TO
SHIFT SOME OF THE EUROFIGHTER COST TO THE MPA, WHICH DOES NOT
WISH TO FUND THE PROGRAM. THE 2003 BUDGET BELT-TIGHTENING
WILL LIKELY SLOW ITALY'S PROGRESS TOWARD THE EU DEFENSE
SPENDING BENCHMARK OF TWO PERCENT OF GDP. OTHER REFORMS WILL,
HOWEVER, REMAIN ON TRACK. FRANCESCO TRUPIANO, DIPLOMATIC

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ACTION EUR-00

INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 COME-00
CTME-00 DODE-00 DOTE-00 SRPP-00 DS-00 EB-00 EXIM-01
E-00 FAAE-00 VC-00 FRB-00 H-01 TEDE-00 INR-00
ITC-01 L-00 VCE-00 AC-01 NSAE-00 OMB-01 OPIC-01
PA-00 PM-00 PRS-00 ACE-00 P-00 SCT-00 SP-00
IRM-00 SSO-00 STR-00 USIE-00 PMB-00 DSCC-00 PRM-00
DRL-02 G-00 NFAT-00 SAS-00 /009W
-------------- F8E2C8 170811Z /38
P 170728Z OCT 02
FM AMEMBASSY ROME
TO SECSTATE WASHDC PRIORITY 6350
INFO EU MEMBER STATES COLLECTIVE PRIORITY
NATO EU COLLECTIVE PRIORITY
AMCONSUL FLORENCE PRIORITY
AMCONSUL FRANKFURT PRIORITY
AMCONSUL MILAN PRIORITY
AMCONSUL NAPLES PRIORITY
DEPT OF TREASURY WASHDC PRIORITY
NSC WASHDC PRIORITY
USDAO ROME IT PRIORITY

C O N F I D E N T I A L SECTION 03 OF 04 ROME 005049

SIPDIS

TREASURY FOR CAROL CARNES

E.O. 12958: DECL: 10/17/2012
TAGS: ECON EFIN PGOV EFIN PGOV EFIN PGOV EFIN PGOV EUN
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PAGE 02 ROME 05049 03 OF 04 170811Z
SUBJECT: THE 2003 BUDGET (PART I): A TIGHTROPE WALK

ADVISOR TO THE MINISTER OF DEFENSE, TOLD US THAT REDUCED MOD
FUNDING WILL NOT SLOW MINISTER MARTINO'S MOVE TOWARD AN
ALL-VOLUNTEER MILITARY. END COMMENT.


12. (SBU) THE UNIONS: THE THREE MAJOR TRADE UNION
CONFEDERATIONS (CGIL, CISL, AND UIL) SET ASIDE THEIR SUMMER
DIFFERENCES (OVER THE GOVERNMENT'S INTRODUCTION OF MODEST
LABOR FLEXIBILITY IN ANNUAL LABOR AGREEMENTS) TO SLAM THE
DRAFT BUDGET. FOR LABOR, THE BUDGET'S PRIORITIES ARE
INVERTED. CAPS ON SPENDING FOR LOCAL SERVICES - WHETHER
PUBLIC CHILD-CARE, HEALTH CARE OR EDUCATION -- WILL MORE THAN
OFFSET ANY BENEFITS ORDINARY WORKERS WOULD GLEAN FROM A TAX
CUT, UNIONS LEADERS ARGUE. IN THEIR EYES, THE
REVENUE-GENERATING TAX AMNESTY IS ONLY THE LATEST EXAMPLE OF
A
FLAWED ECONOMIC POLICY, WHICH EMPHASIZES ACCOUNTING GIMMICKS
AND COZY BENEFITS FOR THE GOVERNMENT'S BUSINESS CONSTITUENCY
OVER LONG-TERM INVESTMENT IN RESEARCH, INFRASTRUCTURE AND
OTHER MEASURES TO DIVERSIFY ITALY'S ECONOMY. CGIL, THE
LARGEST OF THE THREE CONFEDERATIONS, DECLARED THAT ITS
OCTOBER 18 NATIONWIDE GENERAL STRIKE WILL BE A PROTEST
AGAINST THE DRAFT BUDGET AS WELL AS THE LABOR MARKET
FLEXIBILITY PROVISIONS PROPOSED BY CISL AND UIL. (COMMENT:
THIS DECLARATION IS A BIT DISINGENUOUS, GIVEN THAT THE
OCTOBER 18 STRIKE WAS ANNOUNCED LAST SUMMER, BEFORE THE
BUDGET WAS DRAFTED, BUT IS GOOD POLITICS. END COMMENT.) THE
LEADERS OF THE OTHER TWO CONFEDERATIONS, BEYOND ECHOING
WARNINGS ABOUT WEAK SUPPORT FOR THE SOUTH, WARNED THAT THEY
WOULD JOIN CGIL IN THE STREETS IF LOWER-THAN-PROJECTED
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REVENUE PROMPTED THE GOVERNMENT TO CONSIDER REVISING THE
TERMS OF THE NATIONAL LABOR PACTS NEGOTIATED IN THE SUMMER.


13. (SBU) INDUSTRY: ANTONIO D'AMATO, CHAIRMAN OF
CONFINDUSTRIA, ITALY'S INDUSTRIALIST ASSOCIATION, BLASTED
THE BUDGET AS "ONE OF THE WORST LAWS I CAN EVER REMEMBER
BEING WRITTEN." HE HAS HARSHLY CRITICIZED THE GOVERNMENT FOR
NOT TAKING MEASURES TO INCREASE THE COMPETITIVENESS OF THE
ITALIAN ECONOMY, FOR NOT ADOPTING MEASURES TO INCREASE
INVESTMENT IN THE MEZZOGIORNO, AND FOR NOT MAKING FURTHER
CUTS OR REFORMS IN EDUCATION SPENDING . (COMMENT: D'AMATO
HAS BEEN A STRONG PUBLIC SUPPORTER OF THE BERLUSCONI
GOVERNMENT. THIS IS THE FIRST TIME HE HAS OPENLY CRITICIZED
THE GOVERNMENT, ALTHOUGH HE HAS LONG COMPLAINED PRIVATELY
THAT PROMISED TAX CUTS WERE TOO LONG IN COMING. MOREOVER, HE
TARGETED HIS CRITICISMS NOT AT BERLUSCONI PERSONALLY, BUT AT
TWO COALITION PARTIES: ALLIANZA NAZIONALE AND LEGA NORD,
BLAMING THEM FOR THE TIMIDITY AND LACK OF CREATIVITY IN THE
BUDGET. END COMMENT.)


14. (C) THE MEZZOGIORNO: FOR MANY CRITICS, CUTBACKS IN
SPENDING FOR THE ITALY'S UNDERDEVELOPED MEZZOGIORNO HAVE
BECOME THE LIGHTENING ROD FOR CRITICISM OF THE BUDGET. EVEN
ITALIAN PRESIDENT CARLO AZEGLIO CIAMPI, WHO GENERALLY STAYS
ABOVE SUCH POLITICAL FRAY, HAS REMARKED THAT THE BUDGET DOES
LITTLE TO ADDRESS THE INEQUALITY BETWEEN NORTH AND SOUTH, AND
THE UNEMPLOYMENT LEVELS OF 20 PERCENT IN THE MEZZOGIORNO.
COMMENT: DESPITE THE GENUINE CONCERN ABOUT THE MEZZOGIORNO'S
CHRONIC UNEMPLOYMENT, CRITICISM OF BUDGET CUTBACKS FOR THE
REGION SEEMS DISPROPORTIONATELY WIDESPREAD. BY FOCUSING ON
THE MEZZOGIORNO CUTBACKS, D'AMATO AND OTHER FORZA ITALIA
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SUPPORTERS CAN GAIN POLITICAL CAPITAL WITHOUT TACKLING THE
ECONOMIC POLICY OF THE BERLUSCONI GOVERNMENT HEAD ON. END
COMMENT. MEETING WITH US ON OCTOBER 9, DEPUTY FINANCE
MINISTER BALDASSARI REJECTED ALLEGATIONS ABOUT BUDGET
CUTBACKS FOR THE MEZZOGIORNO. HE ARGUED THAT BETWEEN THE
CENTRAL GOVERNMENT'S CONTRIBUTIONS, THROUGH DIRECT TRANSFERS,
GRANTS AND LONG-TERM LOANS, AND EU FUNDS, THE MEZZOGIORNO
WILL RECEIVE A RECORD E9 BILLION THIS YEAR. BALDASSARI ALSO
STRESSED THAT THE FUNDING LEVEL IS LESS IMPORTANT THAN THE
MEZZOGIORNO'S CAPACITY TO ABSORB THAT MONEY. ON AVERAGE, THE
MEZZOGIORNO ONLY HAS BEEN ABLE TO ABSORB A THIRD OF THE EU
MONIES EARMARKED FOR IT, HE SAID.


15. (SBU) THE REGIONS: THE BERLUSCONI GOVERNMENT CAME INTO
OFFICE IN JUNE 2001 PROMISING TO DEVOLVE MORE AUTHORITY TO
THE REGIONAL GOVERNMENTS. DESPITE THIS, BERLUSCONI AND
TREMONTI WANT TO KEEP A TIGHT-REIN ON THE FINANCES OF OFTEN
SPENDTHRIFT REGIONAL GOVERNMENTS. IN THE 2003 BUDGET, THE
GOI PROPOSED AUTOMATIC TRIGGERS THAT WILL FREEZE SPENDING AND
HIRING BY REGIONAL GOVERNMENTS IF THEIR SPENDING 2001 LEVELS
EXCEEDS BY THREE PERCENT. LOCAL GOVERNMENTS ALSO ARE BEING
ASKED TO FOLLOW MORE VIGOROUSLY THE GUIDELINES OF THE EU
STABILITY
PACT. REGIONAL GOVERNMENTS ARE COMPLAINING THAT THE QUALITY

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ACTION EUR-00

INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 COME-00
CTME-00 DODE-00 DOTE-00 SRPP-00 DS-00 EB-00 EXIM-01
E-00 FAAE-00 VC-00 FRB-00 H-01 TEDE-00 INR-00
ITC-01 L-00 VCE-00 AC-01 NSAE-00 OMB-01 OPIC-01
PA-00 PM-00 PRS-00 ACE-00 P-00 SCT-00 SP-00
IRM-00 SSO-00 STR-00 USIE-00 PMB-00 DSCC-00 PRM-00
DRL-02 G-00 NFAT-00 SAS-00 /009W
-------------- F8E2DA 170812Z /38
P 170728Z OCT 02
FM AMEMBASSY ROME
TO SECSTATE WASHDC PRIORITY 6351
INFO EU MEMBER STATES COLLECTVE PRIORITY
NATO EU COLLECTIVE PRIORITY
AMCONSUL FLORENCE PRIORITY
AMCONSUL FRANKFURT PRIORITY
AMCONSU MILAN PRIORITY
AMCONSUL NAPLES PRIRITY
DEPT OF TREASURY WASHDC PRIORITY
NSC WASHDC PRIORITY
USDAO ROME IT PRIORITY

C O N F I D E N T I A L SECTION 04 OF 04 ROME 005049

SIPDIS

TREASURY FOR CAROL CARNES

E.O. 12958: DECL: 10/17/2012
TAGS: ECON EFIN PGOV EFIN PGOV EFIN PGOV EFIN PGOV EUN
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SUBJECT: THE 2003 BUDGET (PART I): A TIGHTROPE WALK

AND DISTRIBUTION OF SERVICES COULD BE AFFECTED, AND HAVE
THREATENED TO RAISE TARIFFS ON TRANSPORTATION AND OTHER
SERVICES TO RAISE REVENUE. COMMENT: FURTHER INCREASES IN
TARIFFS OF TRANSPORTATION AND OTHER PUBLIC SERVICES COULD
RAISE THE IRE OF VOTERS, WHO ALREADY ARE COMPLAINING ABOUT
PRICE INCREASES FOLLOWING THE EURO CONVERSION. HOW REGIONAL
GOVERNMENTS WILL ALLOCATE THEIR FUNDS IS STILL NOT CERTAIN.
END COMMENT.

NOT TOUGH ENOUGH
--------------


16. (SBU) IN CONTRAST TO THE MANY VOICES RALLYING FOR HIGHER
SPENDING FOR PET PRIORITIES, THE 2003 DRAFT BUDGET ALSO HAS
BEEN CRITICIZED FOR NOT ENACTING STRUCTURAL REFORMS AND
CUTTING SPENDING DEEPLY ENOUGH. LEADING THIS CHARGE IS
CENTRAL BANK GOVERNOR ANTONIO FAZIO,
WHO HAS WARNED THE GOVERNMENT THAT IT NEEDS TO BRING DOWN
PUBLIC DEBT LEVELS FROM THE EXPECTED NEAR RECORD HIGH OF 110
PERCENT OF GDP THIS YEAR. FAZIO HAS MADE A PUBLIC APPEAL FOR
GOVERNMENT AND PARLIAMENTARY LEADERS TO MODIFY THE DRAFT
BUDGET TO REDUCE SPENDING MORE AND TO INITIATE NEEDED
STRUCTURAL REFORMS. JUMPING ON THE MEZZOGIORNO BANDWAGON, AND
PARTIALLY UNDERCUTTING HIS OWN ARGUMENT FOR DEEPER SPENDING
CUTS, FAZIO ALSO SUGGESTED A NEED FOR GREATER
GOVERNMENT-FUNDED.

COMMENT: GLOBAL ENVIRONMENT IS KEY
--------------
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17. (SBU) AS THE GOVERNMENT'S DRAFT BUDGET IS DEBATED IN
PARLIAMENT BETWEEN NOW AND THE END OF THE YEAR, IT IS CLEAR
THAT THE LOSING GROUPS ARE NOT GOING TO ACCEPT THE BUDGET
WITHOUT A FIGHT. INDEED, AN UNLIKELY ALLIANCE BETWEEN
BUSINESS LEADERS AND THE UNIONS (AT LOGGERHEADS JUST A FEW
MONTHS AGO OVER ARTICLE 18 OF THE LABOR CODE) CENTER-LEFT
PARLIAMENTARY LEADERS, AND EVEN SOME CABINET MINISTERS ARE
PRESSING FOR SIGNIFICANT CHANGES. PRODUCTIVE ACTIVITIES
MINISTER MARZANO TOLD A GROUP OF YOUNG ENTREPRENEURS ON
OCTOBER 6 THAT HE WOULD "SIT AT A TABLE WITH" THEM TO DISCUSS
POSSIBLE CHANGES TO THE BUDGET. MOD DIPLOMATIC ADVISOR
TRUPIANO TOLD US THAT THE FIGHT FOR THE MOD BUDGET "ISN'T
OVER".


18. (SBU) THE FINANCE MINISTER HAS CREATED A BUDGET INTENDED
TO STIMULATE GROWTH, WHILE NOT INCREASING THE BUDGET DEFICIT.
HE HAS LABORED TO STRIKE A PROPER POLICY BALANCE BETWEEN TAX
CUTS AND SPENDING CUTS, ONE-OFF MEASURES AND LONG TERM
INVESTMENT PLANS. A BUDGET THAT PLEASES NO ONE MAY, INDEED,
BE THE RIGHT PRESCRIPTION.


19. (C) THE 2003 BUDGET IS, HOWEVER, SOMETHING OF A HIGH-RISK
GAMBLE. IF THE GLOBAL ECONOMY RECOVERS IN 2003, THIS POLICY
MIX MIGHT BE ENOUGH TO REVIVE ITALY'S ECONOMY. THE GOI ALSO
WOULD BE WELL-POSITIONED TO MEET STABILITY PACT TARGETS FOR A
BALANCED BUDGET IN 2006. SHOULD ECONOMIC GROWTH IN 2003 PICK
UP, THE GOI ALSO WOULD BE IN POSITION TO TACKLE THE MORE
INTRACTABLE, STRUCTURAL PROBLEMS, SUCH AS LABOR MARKET
INFLEXIBILITY AND A BURDENSOME PENSION SYSTEM, SHOULD IT
SUMMON THE POLITICAL WILL TO DO SO.
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20. (C) HOWEVER, IF THE GLOBAL ECONOMY DOES NOT REVIVE IN
2003, THEN THE GOVERNMENT COULD BE IN A MUCH-WEAKENED
POSITION FOR THE FUTURE.
DEPUTY FINANCE MINISTER BALDASSARI ACKNOWLEDGED THAT THERE
ARE SOME GREAT UNKNOWNS, INCLUDING THE EFFECTS OF A POSSIBLE
FIAT COLLAPSE AND THE COST OF THE GENERAL STRIKES. (NOTE:
ACCORDING TO BALDASSARI, THE FIAT CORPORATE EMPIRE, ALONG
WITH THE BUSINESSES THAT DEPEND ON IT, ACCOUNT FOR FOUR
PERCENT OF ITALY'S GDP. BALDASSARI ALSO CLAIMED THAT ITALY
LOST NEARLY ONE-HALF OF A PERCENTAGE POINT IN GDP GROWTH
BECAUSE OF GENERAL STRIKES THIS YEAR. END NOTE.) THE 2003
BUDGET HAS ANGERED MANY OF THE GOVERNMENT'S MOST STALWART
SUPPORTERS, WHILE THE PROPOSED TAX CUTS TO LOW-INCOME GROUPS
HAVE LIMITED POLITICAL PAYOFF. IF THE GOVERNMENT IS FORCED TO
ENACT EVEN DEEPER SPENDING CUTS DURING 2003, IT WILL FIND FEW
SUPPORTERS. THIS WOULD ENDANGER THE GOVERNMENT'S MANDATE TO
PURSUE CRUCIAL STRUCTURAL REFORMS, SUCH AS PENSION AND
LABOR-MARKET REFORM.

SEMBLER

CONFIDENTIAL

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2002ROME05049 - Classification: CONFIDENTIAL