Italy Fiscal

Italy

Italy: Monti government unveils austerity plan

December 22, 2011

On 22 December, the Italian Parliament approved a set of austerity measures drafted by the new Monti administration. The plan comes on top of further emergency measures approved in August and September and aims at reducing the debt burden of 120% of GDP in 2010, the second largest in the Euro area after Greece, and restore confidence among investors in the sustainability of the country's finances. The bill, worth a total of EUR 30 billion, is shooting for a budgeted balance in 2013, following a deficit target of 3.9% of GDP in 2011 and 1.6% of GDP in 2012. The plan entails an overhaul of the pension system, which will generate budget savings of around EUR 5.3 billion. The reform includes the extension of the contribution-based system to all workers by January 2012 and an increase in the retirement age of all workers to 67 years by 2022. Further savings will come from transfer cuts to regions, provinces and municipalities. The bulk of the bill (around EUR 18 billions), however, will come from higher revenues. Measures on the revenue side will include the reinstatements of a tax on first homes, which had been abolished in 2008, a levy on offshore capital repatriated as a part of a tax amnesty under Berlusconi's government, and increased regional taxes on personal income. The austerity plan has met with resistance from Italian workers. The trade unions have organized strikes in both private and public sectors during the same week in which the parliament discussed and approved the reforms. Market reaction was also muted. While the yield on 10-year government notes moderated from the Euro-era 7.22% peak it reached on 9 November, it has remained consistently above 6.0% in the days following the package approval, ending at 6.46% on 22 December. Market analysts are pricing in the Italian economy's poor growth outlook. The likelihood of a recession was reflected in the updated growth assumptions included in the plan. The government estimates GDP to have expanded 0.6% in 2011, down from an earlier 0.7% estimate.


Author:, Head of Data Solutions

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