April 29, 2013 7:13 pm

Italy premier Enrico Letta tears up €6bn in tax rises

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Italian Prime Minister, Enrico Letta, delivers a speech©EPA

Italian Prime Minister, Enrico Letta

Enrico Letta, Italy’s new centre-left prime minister leading an unprecedented grand coalition, cancelled planned tax rises worth up to €6bn in a clear break with the policies of his technocrat predecessors.

Laying out his programme in his first speech to parliament, Mr Letta said Europe faced a “crisis of legitimacy” and had to change its focus on austerity. He said he would visit Berlin, Brussels and Paris this week to press his case.

“We will die of fiscal consolidation alone. Growth policies cannot wait any longer,” Mr Letta said, describing Italy’s economic situation as “serious” after nearly two years of recession.

In the section of his speech most eagerly anticipated by Italians and by Silvio Berlusconi, former prime minister and centre-right coalition partner, Mr Letta announced the government would not impose the first instalment of an unpopular housing tax due in June nor increase value added tax in July as Mario Monti’s previous government had planned.

But while Mr Letta promised that Italy would abide by fiscal commitments made to Europe he did not explain where the government would find the lost revenues of up to €6bn. Scant reference was made to cuts in public spending, beyond an end to funding of political parties and salaries for ministers. Mr Letta made no mention either of privatisation of state-controlled companies or sales of state assets.

Political commentators immediately interpreted Mr Letta’s speech as a political balancing act aimed at preserving unity in a coalition forced upon his centre-left Democratic party following two months of deadlock since inconclusive elections two months ago.

Mr Berlusconi took his party to the brink of victory in those elections with a fiercely anti-austerity message aimed against Germany’s “hegemony” in Europe. Italy’s recession and anger at the political elite also led to the populist Five Star Movement winning a quarter of votes in parliament where it is now the largest opposition force.

However Mr Letta stressed the pro-Europe orientation of the new government, saying it would push for greater economic and political unity in a “United States of Europe”.

“Europe can return to be the engine of sustainable growth, the engine of hope and future, only if it opens up . . . There cannot be winners and losers,” he said.

Mr Berlusconi’s People of Liberty applauded the promise to lift the housing tax, which the party had set as a precondition for its participation in the three-party coalition.

“I share the words of Enrico Letta’s speech from the first to the last. It is music to our ears,” commented Angelino Alfano, a Berlusconi loyalist and deputy prime minister in the coalition.

In a nod to his own party whose leftwing had opposed the coalition, Mr Letta said Italy’s inadequate welfare system had to be broadened to include more provisions for young people, women and workers on temporary contracts.

Businesses would be given tax incentives to hire young workers, Mr Letta said, stressing that job creation was his government’s priority. Again he did not explain where the funds would be found. No mention was made either of reforms to liberalise labour or services, two controversial areas where Italy remains highly uncompetitive.

Fabrizio Saccomanni, finance minister and former number two in the Bank of Italy, now faces the tough task of balancing the books, presumably through spending cuts, if Italy is to meet a commitment to keep its budget deficit within the 3 per cent target agreed with Brussels.

However, in a welcome development for Italy, with a public debt forecast to hit a record high of 130 per cent of GDP this year, borrowing costs at a treasury auction earlier on Monday of five and 10-year debt fell to their lowest levels since late 2010.

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