UPDATE 1-FACTBOX-What's in Italy's austerity package?

Wed May 26, 2010 3:25pm EDT

 By Gavin Jones
 ROME, May 26 (Reuters) - Italy's cabinet approved an
austerity package on Tuesday to cut the deficit by 25 billion
euros in 2011 and 2012 with the aim of lowering it to 2.7
percent of gdp in 2012 from 5.3 percent last year.
 Here are some key measures of the 54-article plan, which
Prime Minister Silvio Berlusconi said was based largely on
spending cuts and a crackdown on tax evasion and welfare fraud. 
 For a story please click on [ID:nLDE64P1HB]
 
 SPENDING CUTS
 * Cuts in funding to city and regional governments. Economy
Minister Giulio Tremonti said these would amount to 4.5 billion
euros per year, which he classified as "substantial but not
unsustainable".
 * Three-year freeze on public sector pay rises.
 * Cuts for three years in public sector hiring, replacing
only one employee for every five who leave.
 * Progressive pay cuts of up to 10 percent for high earners
in the public sector, including ministers and parliamentarians.
 * Delays of three months or six months in retirement for
those who reach retirement age in 2011.
 * Indexing of retirement age to average national life
expectancy from 2015.
 * 10 percent cut per year in 2011 and 2012 in spending by
all government ministries. 
 * Abolition of provincial governments of areas with fewer
than 220,000 inhabitants.
 * Elimination of 27 publicly-funded institutions, including
ISAE, which conducts Italy's consumer and business confidence
surveys. ISAE's tasks will pass to the economy ministry.
 
 REVENUE-RAISING
 * Partial amnesty for people with houses they have not
declared to the authorities.
 * A crackdown on tax evasion and false benefit claims.
 This includes:
 -- 100,000 checks per year in 2010, rising to 200,000 in
2011 and 2012 on claims for invalidity pensions.
 -- A ban on cash payments for sums above 5,000 euros,
lowering the ceiling from a previous level of 12,500 euros.
 * Tightening tax on stock options and bonuses, in line with
G20 guidelines.
 
 INCENTIVES FOR COMPETITIVENESS
 * Tax breaks for companies investing in Italy's
underdeveloped south.
 * Measures to link salary increases to rises in
productivity, in a bid to eliminate Italy's widening
competitiveness gap with major EU partners.
 * Allowing foreign companies investing in Italy to apply the
tax regime of any European Union country.
 * Creation of "zero bureaucracy" zones in southern Italy
which will cut down on red tape.
 
 WHEN WILL THE MEASURES TAKE EFFECT?
 The vast majority will take effect in 2011. A few will be
brought forward to 2010.
 
 WHAT ARE ITALY'S MOST RECENT ECONOMIC FORECASTS?
 Following are the government's multi-year targets issued on
May 6. Previous forecasts, issued in January, are in brackets.
               2010            2011             2012
GDP               1.0%  (1.1%)    1.5%   (2.0%)    2.0%  (2.0%)
DEFICIT/GDP       5.0%  (5.0%)    3.9%   (3.9%)    2.7%  (2.7%)
DEBT/GDP        118.4% (116.9%) 118.7% (116.5%)  117.2% (114.6%)
PRIMARY BALANCE* -0.4%  (-0.1%)   1.0%  (1.3%)     2.5%  (2.7%)
UNEMPLOYMENT RATE 8.7%   (8.4%)    na   (8.3%)     8.2%  (8.0%)
TAX/GDP RATIO    42.8%           42.4%            42.3%
  *excludes debt servicing costs
 
 HOW URGENT IS DEFICIT REDUCTION FOR ITALY?
 Italy has been spared the worst of the market volatility
since Greece's debt crisis exploded, thanks mainly to the
cautious fiscal policy of Economy Minister Giulio Tremonti,
meaning it is now under less pressure to adopt draconian cuts.
 Italy shunned large-scale stimulus during the recession of
2008 and 2009 and its deficit, at a projected 5 percent of GDP
in 2010, rose far less than in Greece, Spain, Portugal, Ireland
or Britain, which are all in or close to double digits.
 However Italy remains vulnerable due to its massive public
debt of around 118 percent of GDP. Markets and ratings agencies
want evidence that recent rises in the debt can be reversed
through structural deficit cuts and pro-growth policies.
 
 ARE THE MEASURES SURE TO BE APPROVED?
 Prime Minister Silvio Berlusconi has an ample parliamentary
majority, meaning that in theory there should be little threat
of the package not being approved.
 However, Italy's largest trade union, the left-wing CGIL,
has already attacked the budget for unfairly hitting the poorest
Italians hardest. It announced on Wednesday that it would
propose a four-hour general strike in June in protest.
 Berlusconi's popularity has been dropping for months due to
coalition bickering, corruption scandals and a growing awareness
of the size of deficit cuts needed.
 There is a risk that discontent over the cuts could increase
government instability, raise the chance of early elections or
even lead Berlusconi to row back on some of the measures.
 However, senior members of the Berlusconi's centre-right
coalition, including the leader of the pro-autonomy Northern
League Umberto Bossi, have defended the measures as necessary.
 
 -- For an analysis of the budget, click on [ID:nLDE64P055]
 -- For the text of the measures in Italian, click on
[www.tesoro.it/]

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