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.
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* 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.
* Partial amnesty for people with houses they have not declared to the authorities.
* A crackdown on tax evasion and false benefit claims.
-- 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/]