Cautious budget sparks debate

Date: 11/07/1996

By Tim Jones

MARIO Monti is not known for his willingness to cause offence.

The Internal Market Commissioner has held back many of his taxation proposals until he knew they would be acceptable both to other Commission directorates-general and the member states.

So it came as a shock when the senior Italian Commissioner finally came out guns blazing to attack the new centre-left government in Rome for failing to live up to its budgetary promises.

“Firstly, Italy is effectively renouncing full adherence to Europe and secondly, the Italian choice risks creating complications for the very launch of monetary union,” Monti told an Italian newspaper.

The former economics professor and specialist in economic and monetary union was spurred into his remarks by his disappointment over Prime Minister Romano Prodi's plans for a package of budget cuts and revenue-raising measures which will save 8.3 billion ecu in 1996.

This mini-budget package announced on 19 June aims to stabilise the budget deficit this year at the level targeted by the previous government - 5.9&percent; of gross domestic product - rather than a more ambitious aim.

The perennial problem for Italian governments is that they are paying for the sins of their fathers. Revenues comfortably outstrip current spending but, because of a backlog of old debts totalling more than 120&percent; of GDP, simply paying interest means the budget is in deficit by almost 8&percent; of GDP.

Such serious problems require serious measures, in Monti's view. To his dismay, Prodi's government intends to maintain the 4.4&percent; of GDP target for the deficit in 1997 instead of going all out to hit the 3&percent; needed to get Italy into the single currency bloc when it kicks off in January 1999.

“I find it strange that such an authoritive government, respected internationally, backed by the establishment and with no organised cogent opposition, is not setting its sights a bit higher,” he lamented.

Monti's comments earned him a rebuke from Commission President Jacques Santer, who issued a statement welcoming Rome's “concrete efforts” to bring its budget under control.

Monti himself toned down his remarks the next day, telling the Italian parliament that the budget efforts were a “good start”.

He still believes, however, that the sacrifices already being made to achieve a budget deficit of 3&percent; of GDP by 1998 could be brought forward a year.

That way, one of the founding members of the European Communities and one of the EU's four big countries could be an architect of the single currency.

The reluctance of Prodi, his Foreign Minister Lamberto Dini and his Treasury Minister Carlo Azeglio Ciampi - themselves former prime ministers and ardent supporters of EMU membership - to go the extra mile has puzzled observers.

One explanation is that they do not want to push their luck. It could just be that the Italian economy and its government finances have turned a corner. In the same week that Monti launched his attack, the consumer price figures for June showed that inflation had dipped below 4&percent;.

The more conspiratorial view of the trio's behaviour is that they have been given assurances by Paris and Bonn. The rumour-mongers say that the Italians - as long as they continue along their ambitious but realistic path to achieve 3&percent; - will be admitted to the EMU in time for the new millennium.

This conditional membership would buy Italy's support for the entry of Belgium - the other country with public debt bigger than its annual income - into the single currency bloc from day one.

It would also give the Italian government the carrot it needs to dangle in front of voters and coalition partners if they are to accept the big stick of relentless budget-cutting.

The June package itself was needed because a downturn in economic growth to an expected 1.5&percent; this year means that tax revenues are down.

Ciampi's spending cuts will total 5.7 billion ecu and will be concentrated on cash transfers to the railways and the roads authority, as well as the ministries of defence and the post.

Public sector recruitment will be frozen and tax evasion will be tackled.

The 'black economy' in Italy is no joke. A study recently published by Padua University revealed that the state had been cheated of 120 billion ecu in 1995 alone through tax evasion.