AT ELEVENTH HOUR, ITALY APPROVES 2005 BUDGET

UNCLAS ROME 004922

SIPDIS


DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA
PARIS ALSO FOR USOECD
DEPARTMENT OF TREASURY FOR HULL, OASIA HARLOW, STUART
STATE PLEASE PASS CEA
STATE PLEASE PASS FRB FOR GUST
FRANKFURT FOR WALLAR
USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV IT KPRP
SUBJECT: AT ELEVENTH HOUR, ITALY APPROVES 2005 BUDGET


1. ON DECEMBER 29, PARLIAMENT PASSED THE 2005 BUDGET
AFTER A LONG DEBATE TO RECONCILE THE COMPETING DEMANDS
OF GOVERNING COALITION PARTNERS FOR PORK; PRIME
MINISTER BERLUSCONI FOR A TAX CUT; AND FINANCE MINISTER
SINISCALCO FOR A 2005 BUDGET DEFICIT BELOW THE
STABILITY PACT THREE-PERCENT BUDGET DEFICIT/GDP CAP.
THE 2005 BUDGET WAS PASSED ON A CONFIDENCE VOTE JUST
BEFORE THE DECEMBER 31 DEADLINE (BY LAW, BOTH HOUSES OF
PARLIAMENT MUST PASS THE BUDGET BY THEN).


2. ON THE SURFACE, THE 2005 BUDGET INCORPORATES THE
MOST AGGRESSIVE DEFICIT REDUCTION PACKAGE IN THE LAST
DECADE AND SEEKS 24 BILLION EURO (OR 1.7 PERCENT OF
GDP) IN SPENDING CUTS, AND REVENUE INCREASES TO SHRINK
THE DEFICIT/GDP RATIO TO 2.7 PERCENT. THE BUDGET ALSO
INCLUDES A STIMULUS PACKAGE BASED ON A 4.2 BILLION EURO
TAX CUT. EU, OECD, IMF, AND BANK OF ITALY OFFICIALS
HAVE ALL EXPRESSED CONCERN THAT THE BUDGET DEFICIT WILL
ACTUALLY EXCEED 3 PERCENT OF GDP NEXT YEAR, AND THAT
SUPPLEMENTAL, ONE-OFF MEASURES WILL BE REQUIRED IN
2005, MOST LIKELY AFTER THE SPRING ELECTIONS.


3. EMBASSY WILL MAKE TWO COMPREHENSIVE REPORTS ON BOTH
THE TAX PACKAGE AND ON THE 2005 BUDGET IN EARLY 2005.

SEMBLER


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2004ROME04922 - Classification: UNCLASSIFIED