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01-11-2008, 01:01 PM
Jan. 10 (Bloomberg) -- Italian Prime Minister Romano Prodi is seeking to prop up his fragile coalition by breaking a pledge and cutting taxes, barely a year after raising them.
Prodi, facing the lowest popular support ever for his 20- month old government, sought to regain the loyalty of dissenting Communists and Liberal Democrats in a meeting today. The premier announced a ``concrete reduction of the tax burden'' for Italy's lowest-paid workers. The extent of the cuts will be decided in March after reviewing the latest revenue forecasts.
The gamble may cost Prodi his reputation for cleaning up Italy's books after the splurges of his predecessor, Silvio Berlusconi. Berlusconi's spending helped drive Italy's deficit to the highest among the 12 nations in the euro area before Prodi's tax increases and budget cuts brought it below the European Union limit for the first time since 2002.
``This is a blatant electoral move, and he's going for broke,'' Antonio Noto, director of the Rome-based polling company IPR Marketing, said in an interview.
The government will try to produce tax cuts that will leave workers with 100 euros more a month, a plan that would reduce revenue by 10 billion euros this year, Welfare Minister Paolo Ferrero told reporters yesterday before the meeting.
Communist Threat
Ferrero is a member of the Refounded Communists, who brought down Prodi's first government in 1998 when they voted against him in a confidence vote. They have threatened to pull out again if Prodi doesn't deliver higher wages. Prodi only has a two-seat majority in the Senate, leaving him vulnerable to any defections.
Prodi has also been criticized by the pro-market Liberal Democrats, led by former premier Lamberto Dini, who are pushing for cuts in expenditures and the government workforce. With three senators under his wing, Dini has said he will bring the government down unless he is reassured that any tax cuts are adequately funded without incurring greater spending.
``I stand by what I said already,'' Dini told reporters when asked if he would continue to support the government.
Prodi's tax pledge today comes two weeks after he was forced to resort to a confidence vote to pass his 2008 budget. Prodi has called 31 such confidence votes, which stake the government's survival on the outcome, to force dissenting allies to get in line.
Debt Concerns
Raising salaries and slashing taxes would raise the ire of ratings companies and the European Commission, which says Italy must make a priority of reducing its debt, Europe's highest.
Without giving details, Prodi said all tax cuts will be paid for with money recouped from catching tax dodgers and by taxing capital gains at a uniform rate of 20 percent. Currently some capital gains taxes are as low as 12.5 percent and other levies on investment profit exceed that 20 percent rate.
``We won't have to ever ask our workers for a single euro toward fixing our public accounts,'' Prodi said in a document distributed in Rome during the meeting. His 2007 budget rearranged tax brackets that forced many people earning more than 40,000 euros a year to pay higher rates.
``Rather than using the extra revenue to pare down the debt, they are spending it,'' Standard & Poor's Inc. credit analyst Trevor Cullinan said in a telephone interview from London. ``The clear problem is that this government has shown itself to be too weak and divided.''
Rating Cuts
Standard & Poor's and Fitch Ltd. both lowered their ratings on Italy in October 2006, less than six months after Prodi's election. They praised the spending cuts in his first budget while expressing concern about the debt, which had begun rising under Prodi's predecessor.
Berlusconi, 71, won Italy's biggest postwar majority in parliament in 2001 by making lower taxes the centerpiece of his ``Contract with Italians.'' Slowing growth and a ballooning deficit made him scale back that plan. The April 2006 vote he lost to Prodi, 68, was the closest in modern Italian history.
Prodi today sought to placate critics, pointing to his achievement of bringing the deficit under the European Union limit of 3 percent of gross domestic product for the first time since 2002. The deficit this year stood at 1.9 percent in the first nine months of the year and the target to bring debt under 100 percent by 2010 is ``perfectly achievable,'' he said.
Financing Cuts
The refusal to specify the size of the tax cuts points to difficulties in finding the resources to finance them as the economic outlook darkens. Growth will slow this year to 1.4 percent this year from about 1.9 percent last year, the European Commission forecasts. The Treasury must also pay 69 billion euros a year, more than Poland's entire budget, in interest on a debt that is almost 1.1 times Italy's 1.54 trillion-euro economy.
Finance Minister Tommaso Padoa-Schioppa, a former central banker, said in October that there shouldn't be tax cuts until those payments are halved. More recently he softened his stance and said he would have to wait until the government had a better handle on revenue.
``We still haven't found the resources,'' Padoa-Schioppa said today.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aSv7P.Lx2WCU&refer=news
Prodi, facing the lowest popular support ever for his 20- month old government, sought to regain the loyalty of dissenting Communists and Liberal Democrats in a meeting today. The premier announced a ``concrete reduction of the tax burden'' for Italy's lowest-paid workers. The extent of the cuts will be decided in March after reviewing the latest revenue forecasts.
The gamble may cost Prodi his reputation for cleaning up Italy's books after the splurges of his predecessor, Silvio Berlusconi. Berlusconi's spending helped drive Italy's deficit to the highest among the 12 nations in the euro area before Prodi's tax increases and budget cuts brought it below the European Union limit for the first time since 2002.
``This is a blatant electoral move, and he's going for broke,'' Antonio Noto, director of the Rome-based polling company IPR Marketing, said in an interview.
The government will try to produce tax cuts that will leave workers with 100 euros more a month, a plan that would reduce revenue by 10 billion euros this year, Welfare Minister Paolo Ferrero told reporters yesterday before the meeting.
Communist Threat
Ferrero is a member of the Refounded Communists, who brought down Prodi's first government in 1998 when they voted against him in a confidence vote. They have threatened to pull out again if Prodi doesn't deliver higher wages. Prodi only has a two-seat majority in the Senate, leaving him vulnerable to any defections.
Prodi has also been criticized by the pro-market Liberal Democrats, led by former premier Lamberto Dini, who are pushing for cuts in expenditures and the government workforce. With three senators under his wing, Dini has said he will bring the government down unless he is reassured that any tax cuts are adequately funded without incurring greater spending.
``I stand by what I said already,'' Dini told reporters when asked if he would continue to support the government.
Prodi's tax pledge today comes two weeks after he was forced to resort to a confidence vote to pass his 2008 budget. Prodi has called 31 such confidence votes, which stake the government's survival on the outcome, to force dissenting allies to get in line.
Debt Concerns
Raising salaries and slashing taxes would raise the ire of ratings companies and the European Commission, which says Italy must make a priority of reducing its debt, Europe's highest.
Without giving details, Prodi said all tax cuts will be paid for with money recouped from catching tax dodgers and by taxing capital gains at a uniform rate of 20 percent. Currently some capital gains taxes are as low as 12.5 percent and other levies on investment profit exceed that 20 percent rate.
``We won't have to ever ask our workers for a single euro toward fixing our public accounts,'' Prodi said in a document distributed in Rome during the meeting. His 2007 budget rearranged tax brackets that forced many people earning more than 40,000 euros a year to pay higher rates.
``Rather than using the extra revenue to pare down the debt, they are spending it,'' Standard & Poor's Inc. credit analyst Trevor Cullinan said in a telephone interview from London. ``The clear problem is that this government has shown itself to be too weak and divided.''
Rating Cuts
Standard & Poor's and Fitch Ltd. both lowered their ratings on Italy in October 2006, less than six months after Prodi's election. They praised the spending cuts in his first budget while expressing concern about the debt, which had begun rising under Prodi's predecessor.
Berlusconi, 71, won Italy's biggest postwar majority in parliament in 2001 by making lower taxes the centerpiece of his ``Contract with Italians.'' Slowing growth and a ballooning deficit made him scale back that plan. The April 2006 vote he lost to Prodi, 68, was the closest in modern Italian history.
Prodi today sought to placate critics, pointing to his achievement of bringing the deficit under the European Union limit of 3 percent of gross domestic product for the first time since 2002. The deficit this year stood at 1.9 percent in the first nine months of the year and the target to bring debt under 100 percent by 2010 is ``perfectly achievable,'' he said.
Financing Cuts
The refusal to specify the size of the tax cuts points to difficulties in finding the resources to finance them as the economic outlook darkens. Growth will slow this year to 1.4 percent this year from about 1.9 percent last year, the European Commission forecasts. The Treasury must also pay 69 billion euros a year, more than Poland's entire budget, in interest on a debt that is almost 1.1 times Italy's 1.54 trillion-euro economy.
Finance Minister Tommaso Padoa-Schioppa, a former central banker, said in October that there shouldn't be tax cuts until those payments are halved. More recently he softened his stance and said he would have to wait until the government had a better handle on revenue.
``We still haven't found the resources,'' Padoa-Schioppa said today.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aSv7P.Lx2WCU&refer=news