The new Italian cabinet, Silvio Berlusconi’s fourth government, is both strong and weak. It is strong because the government has solid majorities in the House and Senate, and the supporting coalition is less fragmented than in previous Berlusconi cabinets. It is weak because the government is starting with relatively low popular support and no political honeymoon. Italians voted more against Romano Prodi’s government than in favour of Mr Berlusconi. They are rightly tired of a political class that has raised its own wages – up 10 per cent per year in the past 50 years compared with 2-3 per cent for average Italians – rather than address structural impediments to growth in Italy. Fiscal federalism, the electoral law and the fight against tax evasion will be the three most important challenges in the first year.

The first challenge is fiscal federalism. The real winners in the election were two local movements in the Berlusconi coalition: the Northern League and the Movement for Autonomy (of Sicily). The House and Senate majorities depend on them. The Northern League calls for fiscal federalism to prevent public money going south, with proposals that 90 per cent of tax revenues stay in the areas that generate them. The Movement for Autonomy, by contrast, wants revenues from oil refined on the island – no matter where it is sold! – to go to Sicily. Mr Berlusconi’s party (Popolo delle Libertà) has endorsed a bill recently voted on in the Lombardia region. It keeps 80 per cent of revenues from value added tax in the region in which it is generated, 15 per cent of the income tax and all the revenues from taxes on oil, tobacco and gambling. The bill also proposes devolving a number of programmes funded at the national level to local administrations, limiting how much redistribution can occur across regions. If this is adopted nationwide, it would leave some regions without sufficient resources to pay school teachers. Italy badly needs to cut public spending, which has grown faster than its gross domestic product, especially at the local level. By making local governments fiscally responsible it could reconcile these two goals, by imposing political costs if they run large deficits.