17 May 2013

WSJ: Italy takes first steps in reviving economy

Italy's new government took its first concrete steps, announcing some €3 billion in economic measures aimed at offering relief to households and workers amid the country's longest post-war recession.

Prime Minister Enrico Letta, who was sworn in last month as head of a coalition cabinet, said an unpopular tax on primary residences would be suspended and an extra €1 billion would be pumped into a wage-supplement programme. The measures were the bare minimum of what the new government has pledged. Notably, none of the announced benefits address what politicians have identified as the national priority: youth unemployment.

The planned reform will "help households and the construction sector", the prime minister said, adding that businesses would be offered tax credits and breaks on properties they owned as part of production processes. The decision to lower a tax on property is popular, because of Italy's high home-ownership rates. But it also reduces the government's room to manoeuvre on another important issue: lowering income and business taxes.

While Mr Alfano's party demanded the property tax cut, supporters of Mr Letta's centre-left Democratic Party wanted more money for a welfare programme that has come under strain amid the economic downturn. The measure announced on Friday will provide new money for furlough schemes, helping companies keep their workforces intact. However, because those on furlough aren't part of the hoards of jobless people in Italy, the new measures do little to help tackle the country's 11.5 per cent unemployment.

As things stand, Rome has little margin in making its future moves. Mr Letta reiterated his intention to keep this year's budget deficit below 3.0 per cent of gross domestic product, in accordance with European Union rules. That should allow Italy to be released from European strictures on countries with excessive deficits—an outcome cabinet officials expect will provide further fiscal relief by lowering sovereign borrowing costs.

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