Italy. Tax and spend

More public-finance woes for Silvio Berlusconi

IT WAS more of a general grouch than a general strike. On November 30th, millions of Italians stayed away from work for between four and eight hours, disrupting communications and transport, and crippling Italy's output. Why?

The latest of five nationwide stoppages since Silvio Berlusconi took power at the head of a centre-right coalition in 2001 was originally intended as a protest over spending cuts in next year's budget. This aims for €24 billion ($32 billion) of savings, to ensure that Italy keeps within the budget-deficit ceiling of 3% of GDP demanded by the euro area's stability and growth pact. But three days before the strike, Mr Berlusconi arm-twisted his ministers into agreeing that the 2005 budget should also include tax cuts worth €6.5 billion. He threatened to resign as prime minister if he did not get his way.

The threat worked, but his victory created a problem for the organisers of the one-day strike. Some trade unionists promptly said that they were striking against the inequity of the tax cuts, which gave more to the rich than the poor. But this is true only in absolute terms: workers will still get proportionately more tax relief than bosses. Other labour leaders said they were striking because the budget did not do enough for the south. Yet the funds for Italy's Mezzogiorno were among the few to be left untouched by the proposed spending cuts.

The former president of the European Commission, Romano Prodi, returning as unofficial leader of the centre-left opposition, got closer than anybody to the true reason for the protest when he said it was to complain about the “disastrous situation” of the economy. Figures published by the OECD this week forecast that Italy's growth rate this year would once again be one of the lowest in the European Union. Not disastrous, perhaps, but certainly demoralising - and largely the result of the Berlusconi government's timidity over introducing the root-and-branch structural reforms that Italy so badly needs.

However, as the OECD also argued, although there are things wrong with next year's budget, the tax cuts are not among them. Puny they may be - the average taxpayer will be able to spend about one extra euro a day - but they at least represent an attempt by Mr Berlusconi to begin to apply the liberal economics that he was elected for. Even if the tax cuts fail to stimulate consumer demand, they could force the government to rationalise Italy's notoriously wasteful public sector.

The real dangers are either that the savings needed to cover the tax cuts will not be forthcoming or that they will be made in the wrong places. The budget assumes GDP growth next year of 2.1%. That now looks optimistic. Mr Prodi predicts that there will have to be a corrective mini-budget next year. He may well be proved right. In the meantime, there is a risk that the Berlusconi government's knife could follow the line of least resistance, avoiding any cuts that would hurt the powerful vested interests that seek to block any attempt at reform in Italy.

Take the country's schools. The education minister, Letizia Moratti, who like Mr Berlusconi threatened to resign, aborted the original plan, which was to force schools to take the brunt of the savings needed to finance tax cuts. Now there is to be no reduction in the overall number of Italy's strongly unionised teachers. But a proposal to deploy an extra 70,000 staff, purely to teach English in primary schools, is being watered down. Some 28% of Italians speak the world's lingua franca, a figure that the government thinks is too low. In an effort to remedy this, Ms Moratti is making English compulsory in primary schools. Yet the teachers who were supposed to take these classes are now to be saddled with additional general duties. That is hardly the way to help Italy compete better in an integrating world.

Article discusses the economic challenges facing Italy.