Italy: Italian government launches further austerity measures
September 2, 2011
On 12 August, the Italian government adopted a new set of austerity measures, totalling EUR 45 billion in budget cuts, in order to restore confidence among investors in the sustainability of the country's public debt, which ? at almost 120% of GDP ? is the second largest in the Eurozone. The plan comes on top of the EUR 70 billion austerity package approved by the Italian parliament on 15 July, which failed to quell market concerns. Sell-off of Italian bonds continued following approval of the budget cuts, pushing 10-year yields to a 14 year-high of 6.27% on 4 August. The Italian government was prompted to take action by the European Central Bank (ECB), as monetary authorities asked for more credible steps towards fiscal adjustment to be taken before launching into a bond-buying programme with the aim to curb the surge of borrowing costs on Italian debt. ECB purchases of Italian bonds began in the second week of August and proved to be effective in easing the pressure on the country's debt, as yields on 10-year government bonds ended the month at 5.16%. According to the government's plan, the budget deficit will fall to 3.8% of GDP this year and to 1.4% of GDP next year. Finally, a balanced budget will be achieved in 2013, a year earlier than planned in the previous austerity package. The spending cuts envisaged by the plan include budget cuts for the central government, reduced funding for municipalities, provinces and regions, the abolition of 34 provincial governments, as well as measures aimed at reducing the so-called ?cost of politics?, in particular reducing the number of elected officials. Higher revenues are expected to stem from a ?solidarity tax? on higher incomes and from increased taxation on gains from financial investments. The austerity package was passed by decree and must now be approved by Parliament within 60 days of the plan's launch. Some of the measures drafted proved to be unpopular even among members of the governing coalition, and ongoing debate among the ruling majority will probably result in amendments to the original plan.
Author: Armando Ciccarelli, Head of Data Solutions