* PM Letta to face more pressure to cut taxes, spend more
* Hopes to exclude some spending from deficit count
* Deficit risks exceeding 3 pct this year as economy shrinks
By Gavin Jones
ROME, May 29 Italy got some help from Brussels
on Wednesday when the European Commission ruled Rome could go
off its excess deficit blacklist but the new government will
need much more leeway in order to pass the tax cuts it has
Prime Minister Enrico Letta has already suspended the next
installment of a hated housing tax, due in June, and is also
under pressure to cut labour taxes and scrap a planned increase
in sales tax due to take effect in July.
How all this will be paid for without the deficit exceeding
3 percent this year is unclear. Letta is expected to lobby for
the EU to grant Italy more fiscal leeway, such as excluding some
spending from its deficit calculations.
Letta, who took office last month at the head of a fragile
coalition government that has little popular support, welcomed
the Commission's move to take Rome out of its excessive deficit
procedure, which imposes corrective action on countries whose
fiscal gap is deemed too high.
"The merit goes to the efforts of all Italians, who should
be proud of this result," he said.
It is far from clear, whoever, whether the decision will let
Italy spend more and cut taxes to fight its longest post-war
recession which has already lasted for seven quarters.
The Commission forecasts the deficit at 2.9 percent of
output this year, just a fraction below the 3 percent ceiling,
offering no room for manoeuvre unless rules are changed to allow
Rome to exclude some new spending from its deficit calculations.
"Italy has very little margin to keep the deficit below 3
percent," EU Monetary Affairs Commissioner Olli Rehn said.
The government forecasts the economy will shrink by 1.3
percent this year, but many analysts are more pessimistic. The
Organisation for Economic Cooperation and Development on
Wednesday forecast a contraction of 1.8 percent.
The political stakes are high for the future of Letta's
government whose majority in parliament is strongly
anti-austerity. The pressure for more expansionary policies is
likely to increase even more now Italy has come off the deficit
The Commission said Italy's forecast of economic recovery of
1.3 percent for next year was too optimistic and also forecast
that the huge public debt will continue to rise to a peak of
132.2 percent of output next year.
European Commission President Jose Manuel Barroso said the
size of the debt-to-GDP ratio, the second largest in the euro
zone after Greece, was "the reason why we cannot say that Italy
should relax its measures".
Moreover, the Commission saddled Italy with a series of
policy recommendations which Letta will struggle to pass with
such a diverse and divided majority.
For example it called on Italy to cut taxes on labour but to
raise them on consumption and property, whereas the main demand
of the centre-right half of Letta's majority is to eliminate the
housing tax on primary residences definitively.
The Commission also urged Italy to strengthen
anti-corruption legislation, be tougher on tax evasion and
shorten legal proceedings.
These kinds of measures are also unlikely to get the backing
of the centre-right whose leader Silvio Berlusconi this month
lost an appeal against tax fraud but whose case may expire if it
lasts long enough for the statute of limitations to kick in.