* "No magic wand" to balance fiscal discipline and growth
* Employers lobby says budget does not meet expectations
* Government expected to win confidence votes
By James Mackenzie
ROME, Dec 20 Italian Prime Minister Enrico Letta
said on Friday his government's 2014 budget was crucial for
Italy's stability despite it pleasing neither unions nor
The lower house of Italy's parliament is due to vote on a
confidence motion in the early afternoon with the Senate
following on Monday. The government is expected to win both
easily. Confidence motions are regularly used to speed up
The budget, which keeps Italy's public deficit just within
the European Union's ceiling of 3 percent of gross domestic
product this year, trims some taxes and replaces the hated IMU
housing levy. It has been criticised for not doing enough to cut
spending and help growth.
"I have to keep the ship afloat, I want there to be
instruments for growth without wrecking public finances," Letta
told reporters in Brussels where he was attending a summit of
European Union leaders. "Nobody has a magic wand, we can't print
Letta's coalition, based around the centre-left Democratic
Party and a smaller centre-right group led by Interior Minister
Angelino Alfano, is more confident of being able to pass reforms
since a break with former Prime Minister Silvio Berlusconi, who
quit the government last month.
But it faces a huge challenge in turning around an economy
which has shrunk by more than 9 percent since 2007, with youth
unemployment running at over 40 percent and an industrial
infrastructure which has crumbled during the crisis.
The mildly expansionary budget makes only minor adjustments
to current spending and revenue trends, but with the government
determined to banish any doubts about the solidity of public
finances, its room for manoeuvre has been severely limited.
Confindustria, Italy's main business lobby, has been
particularly critical of the government's failure to act more
decisively to cut the so-called "tax wedge" - the difference
between employers' labour costs and a worker's take home pay.
"It's not what we were expecting and it's not enough to get
the country going again," Confindustria President Giorgio
Squinzi said this week.
The budget foresees a reduction in the tax wedge of just
over 2.5 billion euros ($3.42 billion) in 2014 and 3 billion in
2015, which it intends to fund partly out of spending cuts, well
short of Confindustria's call for 10 billion euros in tax cuts.
However there has already been growing concern that
resources originally earmarked to balance tax cuts may be
diverted to fund urgent spending priorities such as unemployment
"I think there have probably been excessive expectations
about our ability to concentrate resources, which are not
enormous, on strategic objectives such as the reduction of the
tax wedge," Economy Minister Fabrizio Saccomanni told RAI state
radio on Friday.
The government expects Italy's budget deficit to fall to 2.5
percent of output in 2014 from a targeted 3.0 percent this year,
on the assumption that the economy grows by 1.1 percent.
That growth forecast is widely considered optimistic and the
public debt is seen rising to almost 133 percent of output this
year and next, second only to Greece's in the euro zone.
The European Commission said the failure to ensure
satisfactory debt reduction meant Italy was not eligible for
budget leeway to increase investments, something Rome had hoped
The budget envisages some 4 billion euros in spending cuts
and 7.3 billion euros in additional revenues this year, set
against 13.9 billion euros in new spending commitments, leaving
a fiscal gap of some 2.6 billion euros.
In addition to the tax wedge cut, the IMU tax on primary
residences will be replaced by a new tax on municipal services
which will go towards funding cash-strapped local authorities,
which will also be given more room to finance investment.
Sales of publicly owned buildings are expected to raise 1.5
billion euros over three years, while top pensions will be held
back and a series of tax breaks will be reorganized. But a
comprehensive spending review under former International
Monetary Fund official Carlo Cottarelli, expected to bring 11.3
billion euros of cuts by 2017, will not begin to produce results
One source of extra income that has been contested in Italy
and abroad is a tax aimed at raising revenue from online
multinationals which currently pay their levies in low-tax
countries like Luxembourg, Ireland or outside the EU.