ITALYS 2003 GOI BUDGET (PART II)

UNCLAS SECTION 01 OF 03 ROME 005083 SIPDIS LABOR FOR ILAB PARIS ALSO FOR USOECD TREAS FOR OASIA HARLOW, CARNES STATE PASS CEA UNCLASSIFIED PAGE 02 ROME 05083 01 OF 03 171457Z STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR E.O. 12958: N/A TAGS: ECON EFIN EFIN EFIN IT KPRP ITECON KPRP ITECON KPRP SUBJECT: ITALYS 2003 GOI BUDGET (PART II) REF: A. ROME 5049 B. ROME 4673 C. ROME 4673 ¶1. SUMMARY: THE GOI PRESENTED ITS 2003 BUDGET TO PARLIAMENT ON OCTOBER 2. REVISIONS ARE EXPECTED BEFORE PARLIAMENT APPROVES THE BUDGET IN LATE DECEMBER. THE 2003 BUDGET TOTALS E619.1 BILLION (47.4 PERCENT OF GDP),WITH A DEFICIT OF E19.6 BILLION (1.5 PERCENT OF GDP). A PACKAGE OF E20 BILLION (1.5 PERCENT OF GDP) IN SPENDING CUTS IS PARTLY OFFSET BY A STIMULUS PACKAGE OF E7.5 BILLION (0.4 PERCENT OF GDP) IN TAX CUTS AND INVESTMENTS IN INFRASTRUCTURE. DEFENSE MINISTRY SPENDING CUTS WILL NOT REQUIRE CUTS IN SPENDING ON PURCHASES OF U.S. EQUIPMENT, ACCORDING TO DEPUTY FINANCE MINISTER BALDASSARI AND FINANCE UNDER SECRETARY TANZI. FINANCE MINISTER TREMONTI DECLARED THAT SIPDIS THIS 2003 BUDGET CAREFULLY BALANCES THE NEED TO STIMULATE ECONOMIC GROWTH, COMPLY WITH STABILITY PACT TARGETS AND FULFILL PROMISES OF TAX CUTS. THE RESULT HAS DRAWN HARSH CRITICISM FROM ALL SIDES, PERHAPS INDICATING THAT THE BUDGET PAIN IS FAIRLY DISTRIBUTED. (REF A) END SUMMARY. ¶2. AFTER APPROVAL BY THE COUNCIL OF MINISTERS ON SEPTEMBER 30, THE GOI PROPOSED BUDGET FOR 2003 - TOTALING 619.1 BILLION EURO (47.4 PERCENT OF GDP) - WAS PRESENTED TO PARLIAMENT ON OCTOBER 2. E199 BILLION (15.2 PERCENT OF GDP) UNCLASSIFIED PAGE 03 ROME 05083 01 OF 03 171457Z IS EARMARKED FOR DEBT SERVICE PAYMENTS, LEAVING E420 BILLION (32.2 PERCENT OF GDP) FOR OTHER GOI SPENDING. THE ESTIMATED DEFICIT IS E19.6 BILLION (1.5 PERCENT OF GDP). ¶3. FINANCE MINISTER TREMONTI PROPOSED A BUDGET THAT T COMBINES SPENDING CUTS OF E20 BILLION (1.5 PERCENT OF GDP) WITH TAX CUTS EQUAL TO E7.5 BILLION (1.5 PERCENT OF GDP). THE E20 BILLION DEFICIT REDUCTION PACKAGE INCLUDES E8 BILLION IN DIRECT SPENDING CUTS AND E12 BILLION IN REVENUE INCREASES. IN PARTICULAR, PROJECTED REVENUES TO REDUCE THE DEFICIT INCLUDE EIGHT BILLION EUROS FROM A LIMITED AMNESTY FOR INCOME TAX EVADERS AND FOUR BILLION EUROS FROM SECURITIZED ASSETS AND FROM THE SALES OF PUBLICLY-OWNED REAL ESTATE. (NOTE: DEPUTY FINANCE MINISTER MARIO BALDASSARRI TOLD US THAT THE GOI PLANS TO REDUCE GENERAL �A;GOVERNMENT SPENDING FROM 47 TO 42 PERCENT OF GDP BY 2006. END-NOTE). ¶4. SPECIFIC STIMULUS MEASURES INCLUDE: -- TAX CUTS: THESE INCLUDE E5.5 BILLION IN TAX CUTS FOR FAMILIES EARNING LESS THAN E25,000 ANNUALLY. CORPORATE TAXES WOULD BE CUT FROM 36 TO 34 PERCENT, AND THE GOI WOULD TAKE THE FIRST STEP TOWARD ABOLISHING IRAP, A REGIONAL TAX ON BUSINESS, WAGES AND INCOME THAT EARNS THE GOI E9.5 BILLION ANNUALLY. -- STIMULUS MEASURES: THESE INCLUDE INCENTIVES FOR HOUSEHOLD CONSUMPTION (CREDIT CARDS PAYMENTS, INSTALLMENT PAYMENTS AND PURCHASE OF HOUSEHOLD APPLIANCES). ALSO UNCLASSIFIED PAGE 04 ROME 05083 01 OF 03 171457Z POSSIBLE IS EXTENSION UNTIL 2003 OF THE 36 PERCENT TAX CREDIT FOR EXPENSES RELATED TO HOME REMODELING. -- INFRASTRUCTURE INVESTMENT: E354.3 MILLION IN INFRASTRUCTURE INVESTMENT, WITH PARTICULAR FOCUS ON KEY PROJECTS THAT ARE CRUCIAL FOR ECONOMIC GROWTH AND HAVE FUTURE REVENUE STREAMS GUARANTEED TO REPAY THE COST OF INVESTMENT. -- PENSIONS: THE MONTHLY MINIMUM PENSION OF E516 WILL BE EXTENDED TO THE 202,000 ITALIAN CITIZENS LIVING ABROAD. THERE WILL ALSO BE INCENTIVES FOR EMPLOYEES TO WORK BEYOND THE NORMAL ITALIAN RETIREMENT AGE OF 58 YEARS AND 37 YEARS OF SENIORITY. -- SUBSIDIES TO THE SOUTH: THE GOI WILL CREATE A FUND TO FINANCE COMPANIES NEW INVESTMENTS IN SOUTHERN ITALY COUPLED WITH PROGRAMS TO HELP THE ABSORPTION CAPACITY OF THE SOUTH. AT THE SAME TIME, GRANTS FOR COMPANIES OPERATING IN THE SOUTH WILL BE CONVERTED INTO TWENTY-YEAR LOW- INTEREST LOANS. DEPUTY MINISTER BALDASSARRI EXPLAINED THAT THIS SHOULD BENEFIT MORE EFFICIENT COMPANIES. -- R AND D: THE GOI WILL PROVIDE AN ADDITIONAL E300 MILLION UNCLASSIFIED UNCLASSIFIED PTQ0030 PAGE 01 ROME 05083 02 OF 03 171457Z ACTION EUR-00 INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 ITCE-00 DOTE-00 ANHR-00 SRPP-00 EB-00 EXME-00 E-00 FAAE-00 UTED-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 IRM-00 SSO-00 SS-00 STR-00 TEST-00 USIE-00 FMP-00 LBA-00 DRL-02 G-00 NFAT-00 SAS-00 /012W -------------- F936E1 171458Z /38 P 171415Z OCT 02 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC PRIORITY 6391 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE USEU BRUSSELS 2851 AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 02 OF 03 ROME 005083 SIPDIS LABOR FOR ILAB PARIS ALSO FOR USOECD TREAS FOR OASIA HARLOW, CARNES STATE PASS CEA UNCLASSIFIED PAGE 02 ROME 05083 02 OF 03 171457Z STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR E.O. 12958: N/A TAGS: ECON EFIN EFIN EFIN IT KPRP ITECON KPRP ITECON KPRP SUBJECT: ITALYS 2003 GOI BUDGET (PART II) INCREASE FOR UNIVERSITY RESEARCH AND DEVELOPMENT. -- WELFARE: THE TERM FOR UNEMPLOYMENT BENEFITS WILL DOUBLE FROM SIX TO TWELVE MONTHS (AT AN ANNUAL COST OF E782 MILLION). ¶5. SPECIFIC SPENDING CUTS AND NEW REVENUE MEASURES INCLUDE: -- TAX AMNESTIES: THE GOI WILL GIVE A LIMITED AMNESTY TO INCOME TAX EVADERS, WHO MAY PAY A FINE RATHER THAN THE TOTAL AMOUNT OF TAXES OWED. ALSO UNDER CONSIDERATION IS A TAX AMNESTY FOR BUILDERS WHO HAVE BUILT WITHOUT A PERMIT. THE TAX AMNESTY FOR THE REPATRIATION OF CAPITAL WILL BE EXTENDED THROUGH JUNE 30, 2003, AFTER WHICH TIME THE FINE WILL BE INCREASED FROM 2.5 TO 4 PERCENT. (THROUGH JULY 2002, ITALIANS REPATRIATED E50 BILLION, GENERATING TAX REVENUES OF E1.25 BILLION.) -- SPENDING CUTS: PUBLIC PROCUREMENT (AS A PERCENT OF GDP) WILL BE CUT FROM 38.1 PERCENT IN 2002 TO 37.6 PERCENT IN ¶2003. THIS WILL BE DONE BY REQUIRING EACH MINISTRY TO CUT BY TEN PERCENT ITS COSTS FOR PURCHASES OF GOODS AND SERVICES, WITH INCREASED RELIANCE ON ON-LINE PURCHASING. UNCLASSIFIED PAGE 03 ROME 05083 02 OF 03 171457Z THE FINANCE MINISTRY CLAIMS TO HAVE CUT ITS 2002 EXPENDITURES FOR GOODS AND SERVICES BY 40 PERCENT THROUGH USE OF ON-LINE PURCHASING (REFTEL). -- EDUCATION: SPENDING CUTS OF E242.2 MILLION IN THE EDUCATION SECTOR, MOSTLY ON SALARIES AND BENEFITS FOR TEMPORARY AND SUBSTITUTE TEACHERS. -- REGIONAL AND MUNICIPAL GOVERNMENT MEASURES: REGIONAL TAX RATES WILL BE FROZEN FOR 2003. CENTRAL GOVERNMENT TRANSFERS TO THE REGIONS WILL BE CAPPED AT NOT MORE THAN THE GOI TARGETED INFLATION RATE (1.4 PERCENT) OVER THEIR 2002 SPENDING, EXCLUDING THE TRANSPORTATION AND HEALTH SECTORS. MUNICIPAL AND PROVINCIAL GOVERNMENT DEFICITS WILL BE CAPPED AT NOT MORE THAN 3.6 PERCENT OVER THEIR 2001 DEFICIT LEVELS. MUNICIPAL GOVERNMENTS THAT EXCEED THIS CAP WILL IN THEORY BE REQUIRED TO FREEZE HIRING AND REDUCE SPENDING ON GOODS AND SERVICES. AT THE SAME TIME, THE CENTRAL GOVERNMENT WILL INCREASE THE PERCENTAGE VALUE ADDED TAX (VAT) REVENUES TRANSFERRED TO MUNICIPAL GOVERNMENTS FROM 4.5 PERCENT TO SIX PERCENT. MACRO ASSUMPTIONS OF THE 2003 BUDGET -------------- ¶6. FINANCE MINISTER TREMONTI EXPLAINED TO PARLIAMENT, WHEN PRESENTING THE 2003 BUDGET, THAT HE HAD USED THE EU ESTIMATES IN THE OFFICIAL BUDGET DOCUMENT, ALTHOUGH THESE WERE CLEARLY OVERLY OPTIMISTIC. THESE INCLUDED PREDICTIONS OF 0.6 PERCENT GDP GROWTH IN 2002, 2.3 PERCENT GROWTH IN 2003, AND 2.9 PERCENT IN 2004. INFLATION ESTIMATES WERE 1.7 UNCLASSIFIED PAGE 04 ROME 05083 02 OF 03 171457Z PERCENT OF GDP FOR 2002 (70 BASIS POINTS BELOW THAT OF THE CONSENSUS FORECAST REF B),AND 1.4 PERCENT FOR 2003. THE 2002 DEFICIT ESTIMATE WAS 2.1 PERCENT, WHILE THE 2003 ESTIMATE WAS 1.5 PERCENT. (NOTE: ITALYS PUBLIC DEFICIT INCREASED TO 40.9 BILLION EURO THROUGH SEPTEMBER 2002, UP P 38 PERCENT OR 11.2 BILLION EURO FROM THE CORRESPONDING PERIOD IN 2002. END NOTE.) EVERYONE UNHAPPY WITH 2003 BUDGET -------------- ¶7. THE GOIS BUDGET PROPOSAL HAS PROVOKED CRITICISM FROM SUCH DIVERSE GROUPS AS THE OPPOSITION CENTER-LEFT POLITICIANS, REGIONAL GOVERNMENTS, UNION LEADERS, INDUSTRY LEADERS AND MANY ECONOMISTS. THE COMPLAINTS WERE AS VARIED AS THE SPEAKERS. CRITICS CLAIMED THAT TAX CUTS WERE TOO SMALL, TOO LARGE OR WRONGLY DIRECTED. THEY ARGUE THAT REGIONAL AND MUNICIPAL GOVERNMENTS WOULD RECEIVE TOO LITTLE, OR TOO MUCH. THE SOUTH WAS BEING CUT OFF FROM NECESSARY FUNDING OR PROVIDED WITH EXCESS FUNDS. ¶8. TAX CUTS: THE CENTER-LEFT POLITICAL OPPOSITION, LEFT- WING CGIL UNION LEADERS, AND SOME ANALYSTS ARGUE THAT UNCLASSIFIED UNCLASSIFIED PTQ0029 PAGE 01 ROME 05083 03 OF 03 171458Z ACTION EUR-00 INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 ITCE-00 DOTE-00 ANHR-00 SRPP-00 EB-00 EXME-00 E-00 FAAE-00 UTED-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 IRM-00 SSO-00 SS-00 STR-00 TEST-00 USIE-00 FMP-00 LBA-00 DRL-02 G-00 NFAT-00 SAS-00 /012W -------------- F936F6 171458Z /38 P 171415Z OCT 02 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC PRIORITY 6392 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE USEU BRUSSELS 2852 AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 03 OF 03 ROME 005083 SIPDIS LABOR FOR ILAB PARIS ALSO FOR USOECD TREAS FOR OASIA HARLOW, CARNES STATE PASS CEA UNCLASSIFIED PAGE 02 ROME 05083 03 OF 03 171458Z STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR E.O. 12958: N/A TAGS: ECON EFIN EFIN EFIN IT KPRP ITECON KPRP ITECON KPRP SUBJECT: ITALYS 2003 GOI BUDGET (PART II) PROPOSED TAX CUTS FOR LOW-INCOME WORKERS WILL NOT HELP THE POOREST ITALIANS. ANTONIO DAMATO, PRESIDENT OF CONFINDUSTRIA (THE INDUSTRIALISTS ASSOCIATION) DECLARED THAT TAX CUTS FOR ALL ITALIANS (TO THE 23 AND 33 PERCENT NT RATES PROMISED BY BERLUSCONI) SHOULD ALREADY BE IN PLACE. DAMATO WAS PARTICULARLY ANGERED BY THE ELIMINATION OF SOME TAX CREDITS FOR COMPANIES. ¶9. INCENTIVES FOR THE SOUTH: THE OPPOSITION CENTER-LEFT CRITICIZED THE CHANGE FROM GRANT TO LOANS, AND THE ELIMINATION OF OTHER INCENTIVES FOR SOUTHERN ITALY. OTHER CRITICS ARGUED THAT THE CONTINUED PROVISION OF HUGE SUBSIDIES TO SOUTHERN ITALY WAS IRRESPONSIBLE. DEPUTY FINANCE MINISTER BALDASSARRI ARGUED THAT THE 2003 BUDGET PROVIDES E9.9 BILLION FOR THE SOUTH IN 2003, A 27.5 PERCENT INCREASE OVER THIS YEARS LEVELS IF EU STRUCTURAL FUNDS ARE INCLUDED. ¶10. CAPPING REGIONAL AND MUNICIPAL GOVERNMENT SPENDING: REGIONAL GOVERNMENTS, INCLUDING THOSE LED BY CENTER-RIGHT POLITICIANS, ARGUED THAT THE CAP ON THEIR EXPENDITURES COULD MEAN DENIAL OF SERVICES TO CITIZENS. PRIME MINISTER BERLUSCONI RESPONDED: SPENDING LEVELS ARE THE SAME AS LAST UNCLASSIFIED PAGE 03 ROME 05083 03 OF 03 171458Z YEAR. THE LOCAL MACHINE WILL CONTINUE TO PROVIDE ALL THE SERVICES THAT IT SHOULD. . ¶11. STRUCTURAL REFORMS: CENTRAL BANK GOVERNOR ANTONIO FAZIO DECLARED THAT GOI HAD NOT INCLUDED URGENTLY-NEEDED STRUCTURAL REFORMS IN THE 2003 BUDGET, INCLUDING TOUGH MEASURES TO CUT THE DEFICIT AND ITALYS PUBLIC DEBT. CONFINDUSTRIAS DAMATO AGREED, ARGUED THAT THE 2003 BUDGET CONTAINED NEITHER IMPROVEMENTS NOR SIGNS OF STRUCTURAL REFORMS. HE SAID HE HAD HOPED TO SEE MORE BUDGET DISCIPLINE IN A COUNTRY WITH THE HIGHEST PUBLIC DEBT IN EUROPE THAT UNFORTUNATELY IS GROWING. (NOTE: ITALYS PUBLIC DEBT IS ONE-FOURTH OF THE OVERALL DEBT OF THE EURO AREA. IN THE 2003 BUDGET, THE GOI POSTPONES PLANS TO REACH THE 100 PERCENT DEBT/GDP RATION UNTIL 2005. COMMENT -------------- ¶12. THE BERLUSCONI GOVERNMENT HAD HOPED TO HAVE SERIOUS ECONOMIC REFORMS IN PLACE BY NOW. FINANCE MINISTER TREMONTIS ORIGINAL, POST-ELECTION PROGRAM CALLED FOR IMPLEMENTATION OF MAJOR TAX REFORM IN 2002 AND PENSION REFORM SOON AFTERWARD. HOWEVER, THE CONTINUED GLOBAL DOWNTURN, COMBINED WITH CONCERN THAT POSSIBLE ACTION IN CTION IN IRAQ COULD DRAG THE WORLD ECONOMY DOWN EVEN FURTHER, HAS COMPLICATED MATTERS. TAX REVENUES ARE DOWN SUBSTANTIALLY, WHILE THE GOI HAS FOUND IT VIRTUALLY IMPOSSIBLE TO CUT UNCLASSIFIED PAGE 04 ROME 05083 03 OF 03 171458Z SPENDING. ¶13. STRUCTURAL ADJUSTMENT, MOVING FORWARD SLOWLY BEHIND THE SCENES, IS NOT A FACTOR IN THIS BUDGET. MAJOR TAX AND PENSION REFORMS ARE BEING SHAPED BEHIND THE SCENES FOR ¶2004. PRIVATIZATION HAS SLOWED TO A CRAWL, PARTLY BECAUSE OF WEAK INTERNATIONAL PRICES FOR SUCH ASSETS. ¶14. THE 2003 BUDGET IS THEREFORE A DIFFICULT COMPROMISE. FINANCE MINISTER TREMONTI IS SEEKING TO COMBINE FISCAL STIMULUS (TO AVOID A FURTHER SERIOUS DOWNTURN) WITH SMALL CUTS IN CENTRAL GOVERNMENT SPENDING AND POLITICALLY DIFFICULT CAPS ON REGIONAL AND MUNICIPAL SPENDING. THE FACT THAT THIS BUDGET PLEASES ALMOST NO ONE MAY BE THE BEST ARGUMENT THAT THE PAIN IS FAIRLY DISTRIBUTED. SEMBLER UNCLASSIFIED > 2002ROME05083 - Classification: UNCLASSIFIED