Identifier
Created
Classification
Origin
06ROME28
2006-01-04 17:05:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Rome
Cable title:
ITALY'S BUDGET: SQUEEZED BY ELECTION-YEAR SPENDING
how-toThis record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 ROME 000028
SIPDIS
SENSITIVE
DEPT FOR EUR/WE, EUR/ERA, EB;IFB/OMA
DEPT PASS TO CEA
PARIS ALSO FOR USOECD
TREAS FOR HULL
USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO
E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV IT KPRP
SUBJECT: ITALY'S BUDGET: SQUEEZED BY ELECTION-YEAR SPENDING
AND EU AUSTERITY COMMITMENT
REF: A. ROME 27
B. 2005 ROME 3697
Introduction, Summary, and Comment
----------------------------------
UNCLAS SECTION 01 OF 03 ROME 000028
SIPDIS
SENSITIVE
DEPT FOR EUR/WE, EUR/ERA, EB;IFB/OMA
DEPT PASS TO CEA
PARIS ALSO FOR USOECD
TREAS FOR HULL
USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO
E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV IT KPRP
SUBJECT: ITALY'S BUDGET: SQUEEZED BY ELECTION-YEAR SPENDING
AND EU AUSTERITY COMMITMENT
REF: A. ROME 27
B. 2005 ROME 3697
Introduction, Summary, and Comment
--------------
1. On December 22, Parliament approved the 2006 budget which
includes euro 27.5 billion in spending cuts and new revenue
measures to shrink the deficit/GDP ratio to 3.8 percent
(Italy's EU ceiling for 2006). Italy's budget process faced
the double pressure of EU deficit ceilings, and front-loaded
election-year spending.
2. On defense, spending as a percentage of GDP amounts to
0.90 percent, down from 0.99 percent. The budget mandates a
5.1 percent nominal cut from 2005 levels, but funding for
existing multi-year programs and investments remains about
the same. Specifically, the 2006 budget includes a nominal
55 million euros a year through 2020 (or, a nominal 825
million a year over fifteen years) for &Major International
and Interforce Programs.8 However, procurement programs not
already under contract, such as the Joint Surveillance and
Command Program (JSCP) and C-17, may be at risk.
3. On peace-keeping (a separate line item from defense),the
budget appropriates one billion euro, down 20 percent from
2005; and on foreign assistance, 400 million euro, down 28
percent from 2005. Italy's high-priority assistance to
Afghanistan, however, will remain uncut in FY 2006.
4. Because of front-loaded spending (or, &pork8) this year
before the April elections, the European Stability Pact
requirement to keep the budget deficit below the 3.8 percent
of GDP-ceiling will mean the new Government will be faced
with a fiscal balancing act in 2006.
5. In sum, Italy is scrimping to meet its international
obligations (on foreign assistance and defense),continues to
over-rely on undependable tax amnesty proceeds, has taken
some steps to curb spending, but has not mustered the
political courage before an election year to make the
necessary structural changes, especially on pensions and
wages.
6. Next steps: On January 12, the European Commission will
review the euro 27.5 billion budget package to see if the
numbers are real and if budget reduction measures (either
budget cuts or revenue-generating measures) are bona fide
(long-term) structural measures, or one-off measures, not
always guaranteed to generate savings or revenue. End
Introduction, Summary, and Comment.
Nibbling at the Deficit...
--------------
7. The bill includes 15.9 billion euro in spending cuts,
including 9.8 billion euro from central government
administration and 6.1 billion euro cuts in regional/local
government transfers. The Finance Ministry explains the
transfer cuts as a continuation of the 2005 budget strategy
to cut all government spending. In particular, some
public-sector wages will be capped; Members of Parliament
will take a ten percent pay cut. While all GOI Ministries
and administrations will be affected, cuts affect only
discretionary spending, not guaranteed employee salary and
benefits.
But There Is New Spending.
--------------
8. The budget also contains 3.3 billion euro in new spending
programs: inter alia, family support (1.2 billion euro),
public-sector wage increases (0.6 billion euro),and pension
measures (0.3 billion euro).
Some New Revenue and Another Tax Amnesty
--------------
9. The budget provides for new revenue of 7.3 billion euro,
mostly from increased business and real estate taxes and
reduced tax deductions.
10. The budget also includes a tax amnesty, despite Finance
Minister assurances there would be no further recourse to
this flawed, one-off deficit reduction measure. The latest
amnesty permits recalcitrant firms and self-employed to pay
only a percentage of delinquent 2003-2004 taxes and to pay a
percentage of taxes due in advance for the next three years
in lieu of regular annual tax returns.
11. Both tax amnesties would net three billion euro. This is
one budget measure the EU Commission will review in January.
12. Finally, the budget also includes a 25-percent
&porno-tax8 on income from pornographic material production
and distribution.
Postponing Lisbon-Fund Commitments Till 2007?
--------------
13. The 2006 budget authorizes raising three billion euro
through real estate sales and privatizations to support
Italy,s reforms under the EU Lisbon Agenda to make the EU
(and Italy) more competitive and knowledge-driven. In view
of Italy,s budgetary difficulties, Italy may shift its
program to 2007.
Military Funding: Peacekeeping Cut, but Only on Paper.
-------------- --------------
14. Peacekeeping mission funding is not a part of defense
operations funding and is carried as a separate line item
apart from the budget. In 2006, the deficit reduction
package ) on paper -- cuts peacekeeping funding for all
peacekeeping missions, including to Iraq, from 1.25 billion
euro in 2005 to 1.0 billion in 2006. However, since
peacekeeping funding is authorized every six months through a
decree law, the GOI could make up for a mid-year funding
shortage by a decree law then transferring funds from other
miscellaneous line items in the general budget (ref B).
Defense Operations Funding
--------------
15. Defense funding (MOD budget, net of domestic security/law
enforcement, or Carabinieri, expenditures) will decrease from
13.6 billion euro in 2005 to 12.9 billion euro in 2006, or by
5.1 percent. As percentage of GDP, 2006 defense funding, as
defined just above, amounts to 0.90 percent of GDP, compared
to 0.99 percent in 2005. To minimize the 2006 reduction,s
impact on defense operations, the GOI last October approved a
decree law to, inter alia, authorize the sale of 968 million
euro in MOD real estate in 2006. The 12.9 billion euro
figure does not include the hypothetical real estate sale
proceeds because the Finance Ministry has now earmarked them
for debt reduction.
16. On multi-year programs and investments, funding remains
just about the same. The defense budget figure of 12.9
billion euro does include 55 million this year for MOD
&Major International and Interforce Programs.8 (Funding
will continue at this amount through 2020.) However,
procurement programs not already under contract, such as the
Joint Surveillance and Command Program (JSCP) and C-17 may be
at risk this year.
17. The 2006 Ministry of Productive Activities budget also
allocates an additional 1.9 billion euro for technological
innovation, managed by this Ministry, and of which some is
available to private firms conducting defense research.
(This figure is not included in the para 14 defense funding
figure.)
18. For the Italian-French multi-mission frigate program
(FREMM),the 2006 Ministry of Productive Activities budget
allocates 30 million euro for 2006, 30 million euro for 2007,
and 75 million euro for 2008. These amounts fund Italy,s
obligation to the program and are carried in the Productive
Activities Ministry budget and are not considered part of
&Major International and Interforce Programs.8
Foreign Assistance
--------------
19. Foreign assistance will decline 27.6 percent, from 552.6
million euro in 2005, to 400 million euro in 2006. FY 2006
foreign assistance represents 0.3 percent of GDP, down from
0.4 percent in 2005. Adding 2006 foreign assistance to
official (e.g., Paris Club) debt relief totals 0.12 percent
of GDP (short of the 0.7 percent Monterrey Conference target
and the 0.36 percent EU average). While it is unclear where
cuts will be made, we do know there will be major cuts to NGO
support. (Comment, as reported Ref A Italy's Special Envoy
for Afghanistan, Anna della Croce, told Charge January 3 that
Italy will not cut its approximately 50 million euro in
Afghan assistance already pledged for 2006. End Comment.)
April Elections Could Mean Early Spending Spree.
-------------- ---
20. While politicians have made strong denials that the
budget contains election-year pork, most expect the ruling
conservative coalition to front load budget expenditures
(especially public works and tourism promotion) to build
support in the run-up to April national elections. This
strategy would mean that the winning coalition may need to
implement a supplemental revenue package (e.g., tax and fee
increases or more tax amnesties) or severely cut spending
after elections to keep the budget deficit below the
Stability Pact 3.8 percent of GDP ceiling. Otherwise, Italy
will again find itself in hot water with the EU for its
excessive deficit.
BORG
SIPDIS
SENSITIVE
DEPT FOR EUR/WE, EUR/ERA, EB;IFB/OMA
DEPT PASS TO CEA
PARIS ALSO FOR USOECD
TREAS FOR HULL
USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO
E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV IT KPRP
SUBJECT: ITALY'S BUDGET: SQUEEZED BY ELECTION-YEAR SPENDING
AND EU AUSTERITY COMMITMENT
REF: A. ROME 27
B. 2005 ROME 3697
Introduction, Summary, and Comment
--------------
1. On December 22, Parliament approved the 2006 budget which
includes euro 27.5 billion in spending cuts and new revenue
measures to shrink the deficit/GDP ratio to 3.8 percent
(Italy's EU ceiling for 2006). Italy's budget process faced
the double pressure of EU deficit ceilings, and front-loaded
election-year spending.
2. On defense, spending as a percentage of GDP amounts to
0.90 percent, down from 0.99 percent. The budget mandates a
5.1 percent nominal cut from 2005 levels, but funding for
existing multi-year programs and investments remains about
the same. Specifically, the 2006 budget includes a nominal
55 million euros a year through 2020 (or, a nominal 825
million a year over fifteen years) for &Major International
and Interforce Programs.8 However, procurement programs not
already under contract, such as the Joint Surveillance and
Command Program (JSCP) and C-17, may be at risk.
3. On peace-keeping (a separate line item from defense),the
budget appropriates one billion euro, down 20 percent from
2005; and on foreign assistance, 400 million euro, down 28
percent from 2005. Italy's high-priority assistance to
Afghanistan, however, will remain uncut in FY 2006.
4. Because of front-loaded spending (or, &pork8) this year
before the April elections, the European Stability Pact
requirement to keep the budget deficit below the 3.8 percent
of GDP-ceiling will mean the new Government will be faced
with a fiscal balancing act in 2006.
5. In sum, Italy is scrimping to meet its international
obligations (on foreign assistance and defense),continues to
over-rely on undependable tax amnesty proceeds, has taken
some steps to curb spending, but has not mustered the
political courage before an election year to make the
necessary structural changes, especially on pensions and
wages.
6. Next steps: On January 12, the European Commission will
review the euro 27.5 billion budget package to see if the
numbers are real and if budget reduction measures (either
budget cuts or revenue-generating measures) are bona fide
(long-term) structural measures, or one-off measures, not
always guaranteed to generate savings or revenue. End
Introduction, Summary, and Comment.
Nibbling at the Deficit...
--------------
7. The bill includes 15.9 billion euro in spending cuts,
including 9.8 billion euro from central government
administration and 6.1 billion euro cuts in regional/local
government transfers. The Finance Ministry explains the
transfer cuts as a continuation of the 2005 budget strategy
to cut all government spending. In particular, some
public-sector wages will be capped; Members of Parliament
will take a ten percent pay cut. While all GOI Ministries
and administrations will be affected, cuts affect only
discretionary spending, not guaranteed employee salary and
benefits.
But There Is New Spending.
--------------
8. The budget also contains 3.3 billion euro in new spending
programs: inter alia, family support (1.2 billion euro),
public-sector wage increases (0.6 billion euro),and pension
measures (0.3 billion euro).
Some New Revenue and Another Tax Amnesty
--------------
9. The budget provides for new revenue of 7.3 billion euro,
mostly from increased business and real estate taxes and
reduced tax deductions.
10. The budget also includes a tax amnesty, despite Finance
Minister assurances there would be no further recourse to
this flawed, one-off deficit reduction measure. The latest
amnesty permits recalcitrant firms and self-employed to pay
only a percentage of delinquent 2003-2004 taxes and to pay a
percentage of taxes due in advance for the next three years
in lieu of regular annual tax returns.
11. Both tax amnesties would net three billion euro. This is
one budget measure the EU Commission will review in January.
12. Finally, the budget also includes a 25-percent
&porno-tax8 on income from pornographic material production
and distribution.
Postponing Lisbon-Fund Commitments Till 2007?
--------------
13. The 2006 budget authorizes raising three billion euro
through real estate sales and privatizations to support
Italy,s reforms under the EU Lisbon Agenda to make the EU
(and Italy) more competitive and knowledge-driven. In view
of Italy,s budgetary difficulties, Italy may shift its
program to 2007.
Military Funding: Peacekeeping Cut, but Only on Paper.
-------------- --------------
14. Peacekeeping mission funding is not a part of defense
operations funding and is carried as a separate line item
apart from the budget. In 2006, the deficit reduction
package ) on paper -- cuts peacekeeping funding for all
peacekeeping missions, including to Iraq, from 1.25 billion
euro in 2005 to 1.0 billion in 2006. However, since
peacekeeping funding is authorized every six months through a
decree law, the GOI could make up for a mid-year funding
shortage by a decree law then transferring funds from other
miscellaneous line items in the general budget (ref B).
Defense Operations Funding
--------------
15. Defense funding (MOD budget, net of domestic security/law
enforcement, or Carabinieri, expenditures) will decrease from
13.6 billion euro in 2005 to 12.9 billion euro in 2006, or by
5.1 percent. As percentage of GDP, 2006 defense funding, as
defined just above, amounts to 0.90 percent of GDP, compared
to 0.99 percent in 2005. To minimize the 2006 reduction,s
impact on defense operations, the GOI last October approved a
decree law to, inter alia, authorize the sale of 968 million
euro in MOD real estate in 2006. The 12.9 billion euro
figure does not include the hypothetical real estate sale
proceeds because the Finance Ministry has now earmarked them
for debt reduction.
16. On multi-year programs and investments, funding remains
just about the same. The defense budget figure of 12.9
billion euro does include 55 million this year for MOD
&Major International and Interforce Programs.8 (Funding
will continue at this amount through 2020.) However,
procurement programs not already under contract, such as the
Joint Surveillance and Command Program (JSCP) and C-17 may be
at risk this year.
17. The 2006 Ministry of Productive Activities budget also
allocates an additional 1.9 billion euro for technological
innovation, managed by this Ministry, and of which some is
available to private firms conducting defense research.
(This figure is not included in the para 14 defense funding
figure.)
18. For the Italian-French multi-mission frigate program
(FREMM),the 2006 Ministry of Productive Activities budget
allocates 30 million euro for 2006, 30 million euro for 2007,
and 75 million euro for 2008. These amounts fund Italy,s
obligation to the program and are carried in the Productive
Activities Ministry budget and are not considered part of
&Major International and Interforce Programs.8
Foreign Assistance
--------------
19. Foreign assistance will decline 27.6 percent, from 552.6
million euro in 2005, to 400 million euro in 2006. FY 2006
foreign assistance represents 0.3 percent of GDP, down from
0.4 percent in 2005. Adding 2006 foreign assistance to
official (e.g., Paris Club) debt relief totals 0.12 percent
of GDP (short of the 0.7 percent Monterrey Conference target
and the 0.36 percent EU average). While it is unclear where
cuts will be made, we do know there will be major cuts to NGO
support. (Comment, as reported Ref A Italy's Special Envoy
for Afghanistan, Anna della Croce, told Charge January 3 that
Italy will not cut its approximately 50 million euro in
Afghan assistance already pledged for 2006. End Comment.)
April Elections Could Mean Early Spending Spree.
-------------- ---
20. While politicians have made strong denials that the
budget contains election-year pork, most expect the ruling
conservative coalition to front load budget expenditures
(especially public works and tourism promotion) to build
support in the run-up to April national elections. This
strategy would mean that the winning coalition may need to
implement a supplemental revenue package (e.g., tax and fee
increases or more tax amnesties) or severely cut spending
after elections to keep the budget deficit below the
Stability Pact 3.8 percent of GDP ceiling. Otherwise, Italy
will again find itself in hot water with the EU for its
excessive deficit.
BORG