March 6, 2014 / 9:36 AM / in 4 years

UPDATE 1-Italy's new government targets ambitious spending cuts -paper

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MILAN, March 6 (Reuters) - Italy’s new government will fund a key reduction in labour taxes through ambitious spending cuts and a better use of European structural funds, new economy minister Pier Carlo Padoan said in a newspaper interview on Thursday.

The centre-left government of Matteo Renzi has pledged to accelerate the sluggish pace of reforms in the euro zone’s third-biggest economy, which is one of the worst-performing in the currency bloc.

It has said one of its first priorities will be to cut the so-called tax wedge - the difference between what an employer pays and a worker takes home.

Padoan told Il Sole 24 Ore newspaper he believed it would be possible to raise more than the 3 billion euros in spending cuts envisaged by the previous government for the first year.

“I would say 5 billion euros annually is not an unreasonable figure,” Padoan said in an interview with Il Sole 24 Ore.

He said European funds and one-off measures such as the repatriation of capital could be used to cover the rest.

Italy has so far been unable to significantly rein in its public spending and has improved its public finances in recent years mainly through higher taxes.

Padoan said Italy was committed to keeping its budget deficit below the EU ceiling of 3 percent of output.

On Wednesday, the European Commission put Italy on its watch list because of the country’s very high public debt and weak competitiveness and said decisive action was needed to correct imbalances in the economy. It will now monitor Italy’s reforms and could impose fines if they are not implemented.

The economy minister said measures to pay state arrears to companies were ready and would be discussed at the next cabinet meeting.

“Thanks to the involvement of (state lender) CDP we think we can structurally resolve the problem,” he said.

Padoan said concerns raised by rating agency Fitch, which on Wednesday warned that CDP’s involvement could pressure its credit rating if it eventually raised its debt level, were “completely out of place.”

“CDP and banks will be involved in a three-party scheme that will benefit everyone,” he said.

Italian companies were owed between 75 billion and 80 billion euros in payment arrears by the country’s public administration at the end of 2012, the European Union Industry Commissioner Antonio Tajani said on Tuesday.

Asked about the idea of creating one or more “bad banks” to hold non-performing loans that plague the balance sheets of Italy’s lenders Padoan said “it could be a useful tool” without any further detail.

Bank of Italy Governor Ignazio Visco has said the regulator is examining solutions to help domestic banks get rid of bad loans, including possibly through a public guarantee to banks that get together to offload problematic debts.

Under the previous government of Prime Minister Enrico Letta, the Economy Ministry had said it saw no need to set up a bad bank using either public or European Union funds.

Italian banks held nearly 156 billion euros in bad loans at the end of last year, central bank data show. ($1 = 0.7278 euros) (Reporting by Isla Binnie and Stephen Jewkes Editing by Catherine Evans)

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