Italy's Deficit Issue

This in the FT today:


Italy vows to keep cutting deficit



Published: July 4 2007 12:05 | Last updated: July 4 2007 12:05

Italian Economy Minister Tommaso Padoa-Schioppa said on Wednesday that he shared EU concerns over Italy’s high debt and need for pension reform, and vowed to push ahead with deficit-cutting measures, despite spending an extra €6.5bn on welfare.

“The road to reaching a balanced budget could be quicker,” he told La Repubblica television. “We have not changed direction, though the pace has slowed down slightly,” he said.

It followed a double blow on Tuesday, when the European Commission said Italy (along with France, Greece, Slovenia, Austria and Portugal) was “acting against the spirit and letter of the preventive part of the Stability Pact” by not reducing the budget deficit by 0.5 per cent a year.

The IMF also criticised Italy’s mid-term economic and financial plan, known as the DPEF, released last week. The fund said it failed either to “put the state budget on solid ground,” or “reach the goals of growth and social justice that the government has indicated.”

The DPEF, forecasts growth will fall from 2 per cent in 2007 to 1.9 per cent in 2008.

Meanwhile the deficit forecast has been revised upwards from 2.3 per cent of GNP to 2.5 per cent in 2007, and from 2 per cent to 2.2 per cent in 2008. This would make it very difficult for Italy to meet its promise to the EU to run a ”close to balance” budget by 2010.

According to the government, this programme should reduce Italy’s national debt, now the highest in Europe at around 107 per cent of GNP, to 100 per cent of GNP by 2009-2010.

Servicing the debt costs the equivalent of about 5 per cent of GNP, a figure that would rise if, as appears likely, interest rates rise.

The European Commission and IMF say Italy’s decision to scale back plans to cut its budget deficit, plus delays in reforms to state pensions, will hinder progress in reducing public debt.

The Italian government has proposed extra welfare spending for people on low pensions, for families and young people.