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 ITALY'>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
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
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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
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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

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2002ROME05083 - Classification: UNCLASSIFIED