* New PM Renzi plans sweeping tax cuts
* European Commission, ECB warn Italy on debt commitments
* Renzi economics advisor: growth key to debt reduction
* Italian borrowing costs fall at auction
By Gavin Jones
ROME, March 13 Italian Prime Minister Matteo
Renzi could struggle to convince the European Union that his
ambitious tax cuts and spending commitments will not threaten
pledges to sort out public finances.
On Wednesday, the 39-year-old former mayor of Florence
announced income tax would be cut by 10 billion euros ($14
billion) annually for 10 million low- and middle-income workers
from May 1 to try to stimulate a chronically sluggish economy.
In a typically buoyant, informal news conference involving
slogans and Powerpoint slides, Renzi also promised to cut a
regional business tax, reduce company energy bills and pay off
the entire arrears of commercial debt owed by public sector
bodies by July.
The problem for Renzi is how to pay for the promises, given
European institutions' apparent impatience with Italy's
inability to cut the second highest public debt in the euro
zone, at around 133 percent of gross domestic product (GDP).
"This year we are putting into place the spending reductions
that will finance our tax cuts on a permanent basis; this is
sound economics," Filippo Taddei, economics spokesman for
Renzi's Democratic Party, told Reuters in an interview.
With euro bond markets currently favouring higher-yielding
debt, Italy sold all of a planned 7.75 billion euros of
government paper on Thursday, paying record low yields on three
year and 15-year bonds.
The European Commission and the European Central Bank were
more cautious. "We recall that Italy has to respect its
commitments under the stability and growth pact, especially in
view of its very high public debt," Commission spokesman Simon
O'Connor told a briefing in Brussels.
It is easy to get the impression that the Commission is less
indulgent towards Renzi, who cultivates his image as an
outsider, than it was towards his predecessors Enrico Letta and
Mario Monti, both seen as more orthodox, institutional figures.
Last week the Commission put Italy, one of the EU's founding
members, on a watch list alongside the ex-Yugoslav economies of
Slovenia and Croatia, citing its weak productivity and unwieldy
debt. It took Spain off the list, noting its recent reform
On Thursday the ECB said in its monthly bulletin, albeit
written before Renzi's tax plan, that Italy had made "no
tangible progress" since November in cutting its deficit and
Renzi's team of mostly young ministers and economic advisers
are convinced Europe will cut them some slack when it realises
how serious the government is about making permanent spending
cuts and spurring productivity.
"The ECB is waiting for tangible measures and that is what
we are trying to propose now," said Taddei, 37, who teaches
economics at Johns Hopkins University in Bologna.
"The problem Italy has is growth, not fiscal prudence,"
Taddei said, pointing out that Rome's budget surplus net of debt
servicing costs is already among the highest in the EU.
"We will keep on being prudent but we have to address the
issue of growth."
Cabinet Undersecretary Graziano Delrio also stressed that
Italy's debt-to-GDP problem was "all about the growth part of
the equation, not the debt part."
Renzi said his tax cuts would be financed by reductions in
central government spending, extra borrowing and resources freed
up by the recent fall in Italy's borrowing costs.
He made clear the current 2014 deficit target of 2.5 percent
of GDP would be raised, while remaining below the EU's 3 percent
Some analysts said he was backtracking on previous promises
that any tax cuts would be entirely financed by lower spending.
But Taddei said structural spending cuts needed some time to
be fully effective while the tax cuts would hit public accounts
straight away. A little extra borrowing and use of the dividend
from lower bond yields would be a temporary cushion.
Renzi will also need European approval for his plans to use
the state holding company Cassa Depositi e Prestiti (CDP) as an
agent to pay off some 43 billion euros of commercial arrears
owed by the state to private suppliers.
The CDP will pay off the cash-starved companies immediately,
while the government will then pay back the CDP gradually over
coming years, Taddei explained.
This will spread out the inevitable increase in public debt,
which is only booked when bonds are issued by the state to
reimburse the CDP.
Taddei said he believed the scheme had already been
discussed with EU authorities and he was confident of EU
support. "I think the Commission will be open to what we are
proposing if they understand that what we are doing will have a
permanent, not a transitory effect on the economy," he said.