RPT-UPDATE 2-Fitch cuts Italy's debt rating; cites weak growth, political risk
* Cites high debt, bank woes, backloading fiscal consolidation
* Spending commissioner's unpublished report on cuts little heeded
* Rome has recently cut its target for spending cuts
* Vested interests standing in the way of effective cost cuts
* Public spending at 51 percent of GDP, 8th highest in EU
By Gavin Jones and Giuseppe Fonte
ROME, July 13 Carlo Cottarelli left a high-level job at the International Monetary Fund last year to help the Italian government cut high public spending. Nine months on, the craggy 59-year-old economist and newly minted "spending commissioner" has made little headway.
Most of the cuts he suggested in a 72-page review of Italy's public administration - an unpublished tome seen by Reuters that picks apart services ranging from disability benefits to policing - appear to have been ignored by Matteo Renzi's government.
Rome recently reduced an original target of spending cuts to be achieved by 2015 to 14 billion euros from 17 billion, lowering this year's goal to 3 billion from 4.5 billion.
The hurdles facing Cottarelli's mission - politically influential lobbies and an inefficient bureaucracy - are the same as those that have dragged Italy's economy to a virtual standstill for the past 20 years.
Italy's public spending amounts to 51 percent of national output - the eighth highest proportion in the 28-nation European Union. The level is not in itself the cause of Italy's thwarted growth; countries like France and Sweden have managed stronger growth while spending more than Italy. Inefficiency and wastefulness is the problem Cottarelli was brought in to fix.
A key example is pensions. Italy has recently tightened pension rules, partly by raising the retirement age, but it still spends 15 percent of gross domestic product on retirees. That's the highest in Europe, comparing with 11 percent in Germany and 7 percent in Britain.
Part of the expenditure goes to millions of people who retired in their 40s and 50s, thanks to generous programmes - dubbed "baby pensions" - that lasted until the 1990s. Yet no government has been willing to touch pensioners. That's largely because in what is the European Union's second-oldest population after Germany, there are a lot of them, and they are more likely to vote. They also make up nearly half of all union members.
"I worked for 33 years and didn't take anything I wasn't entitled to," says Pietro D'Ascanio, a 78-year-old former chemical firm electrician from Ferrara in northern Italy who retired at 56 on a life-time pension worth more than 80 percent of his final salary.
One of Cottarelli's proposals is to cut high pensions - but Renzi said in March he was "not very convinced" by the idea. He also said he was "not enthused" by Cottarelli's document.
Italy's new 39-year-old leader is trying to make some progress in curbing profligacy. For example he has set a ceiling on the salaries of public sector managers and is curbing the budget of state broadcaster RAI. However, the savings are tiny as a proportion of the state budget, and critics say they have more of a symbolic value than an economic one.
Renzi's spokesman was not immediately available for comment.
Renato Brunetta, a centre-right politician who served as Italy's public administration minister in the 2008-2011 government of Silvio Berlusconi, says he tried for years to cut public sector waste. But he says he was blocked by resistance from trade unions that his government was unwilling to override.
"Italy has 820 billion euros of public spending, which is the well that politicians and institutions draw their support from. If you erode that, then you are changing the power structure of the country," he said in an interview.
Cottarelli, who was brought back to Italy in October by Renzi's predecessor Enrico Letta, had spent the previous five years as head of the IMF's fiscal affairs department, where he was responsible for monitoring states' finances and making recommendations on how to improve them.
Letta tasked Cottarelli with finding targeted savings, such as identifying which hospitals in Italy had too many beds or which towns had superfluous street lighting, rather than opting for the usual strategy of overall cuts in certain categories or ministerial budgets, which can eat into productive investments and important public services along with the waste.
Cottarelli got to work, and in March gave his 72-page document to Renzi. The report, while referenced in various public appearances by Cottarelli, was never published.
In it there are dozens of cost-cutting proposals affecting areas from the national rail service to state subsidies to companies.
In the section dealing with pensions, the report urges the government to crack down on the improper provision of disability pensions, which have been targeted by fraudsters and have often been doled out as a form of political patronage, especially in the poor southern regions.
Last month police in the northern city of Bergamo confiscated the car of a woman who had been arrested for drunken driving. It later emerged that for six years she had been receiving a disability pension for blindness, the local finance police told Reuters.
Disability pensions have risen 50 percent since 1998, with no demographic explanation, Cottarelli notes in the report. And there are twice as many people receiving disability pensions in the southern regions of Calabria, Campania, Puglia and Sicily as in the northern ones of Veneto, Emilia and Lombardy.
There has been no mention of the issue by the government.
In the document, Cottarelli targets the overlap between Italy's two main police forces, the Carabinieri, a military unit, and the Polizia. Italy has 466 police per 100,000 inhabitants, compared with 312 in France and 298 in Germany.
Cottarelli proposed that the finance police drop its riot unit, because controlling riots is not in their remit. But the proposal met huge opposition from the Guardia di Finanza and their sponsors in parliament. The government has not taken it up.
The result is that the Renzi government's first announced cut in spending - 500 million euros that had been promised by this July - was finally effected by an across-the-board cut in the spending of all ministries.
There is another hurdle on the path to cutting spending in Italy; most laws in Italy can only come into effect after so-called "implementation decrees" that are aimed at sorting out the nuts and bolts of the legislation and signed by officials in central and local government ministries.
But these officials often have an interest in stalling the decrees, which means that many laws passed by parliament never take effect. Even when there is no obstruction, the process is long, because some of the decrees also have to be sanctioned by the country's main administrative and accounting authorities, the Council of State and the Audit Court.
Government figures show that since Mario Monti became Prime Minister in 2011, only 43 percent of the implementation decrees needed to enforce legislation have been passed. More than 800 decrees are awaiting approval, of which 245 have expired, consigning the relevant measure to the scrap heap.
Implementation troubles have also marred Italy's efforts to pay back money owed by the state to private suppliers. The unpaid debts are widely considered a brake on the economy, because they mean companies are deprived of the cash to invest money in new equipment or research or to hire workers.
According to the European Union, it takes an average of 170 days to pay for services or goods provided in Italy, compared with an EU directive mandating a maximum of 60 days.
Luigi Boggio, managing director of B. Braun Milano SpA, the local unit of the global healthcare supplies company, says he is owed 70 million euros - a considerable chunk for a company that made 175 million euros last year. On top of the cost of not being able to invest is the cost of borrowing from banks to fill the gap, says Boggio. "That's a lot in terms of loss of competitiveness," he says.
Of 27 billion euros of repayments authorised by Letta to be settled by the end of 2013, 3.5 billion are still outstanding.
One problem is that there is no precise estimate of how much money is actually owed, partly because there are so many levels of government involved, from town halls to the central state. Reimbursing the money also raises Italy's debt level, which is already the euro zone's second highest.
Renzi is pushing for Italy's debt reduction commitments to the EU to be eased to avoid what he calls the EU's "Kafkaesque logic" of telling it to settle its debts but not giving it the fiscal leeway to do so. (additional reporting by Giselda Vagnoni and Antonella Cinelli; editing by Alessandra Galloni, Philippa Fletcher and Will Waterman)
* Cites high debt, bank woes, backloading fiscal consolidation
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