Are Prodi's Proposed Italian Budget Cuts For 2007 Too `Modest'?

Such at any rate is the opinion Bank of Italy Governor Mario Draghi holds of Prime Minister Romano Prodi's 2008 budget. He stated yesterday that the budget proposals fail to cut spending and sufficiently reduce what is effectively the biggest government debt in the EU.

"Progress on deficit cuts is modest" Draghi said during testimony in Rome's Senate. Next year's proposed budget "doesn't take advantage of an increase in tax revenue to accelerate debt reduction" and puts at risk the objective to balance the budget by 2011.

Romano Prodi has proposed a spending package that cuts housing taxes, lowers levies for poor families, and boosts spending on public works, while polls indicate his popularity is sagging to an all-time low. All the members of Prodi's nine-way coalition resisted spending cuts, and some are threatening to vote against the budget - and the government - if the Prodi refuses to scale back plans to contain pension costs.

Draghi's criticism comes just two days after European Union Monetary Affairs Commissioner Joaquin Almunia said Italy's budget wasn't "ambitious" enough in it's attempts to tame the deficit and debt, which is forecast to fall to 105 percent of gross domestic product this year from 106.8 percent in 2006.

Also it comes hot on the tail of a decision by the EU finance ministers to urge the Debt Rating Agencies to be more vigilant. I'm sure the Italian case was not in the forefront of their minds when they took this approach, but as Claus Vistesen observes rather wryly, the Italian representatives may well have been sitting at the table with some uneasiness during this entire discussion.

Rather significantly Standard & Poor's said last week that the current budget plan won't alter its rating outlook, and it predicts Italy may fail to meet its goal of bringing the debt below 100 percent of GDP by 2010.

"In the absence of any significant structural reforms, Standard & Poor's believes that the government will fail to meet its target debt level of less than 100 percent of GDP by 2010" the rating agency said in a press note, and I'm sure the EU finance ministers said "quite right too".

All of this follows hot on the heels of declarations by Italian Finance Minister Tommaso Padoa-Schioppa that substantial tax cuts will only be possible once the government slashes interest payments on thedebt by half.

Italy's debt is "gigantic" and costs Italians 1,200 euros ($1,700) each annually, Padoa-Schioppa told the Italian Senate last week. "Halving debt servicing costs to 35 billion euros could free up money for cutting taxes..... but for now, interest expenses and widespread tax evasion limit the government's ability to trim taxes".

"We know that taxes are high in Italy.....No one brings up the fact that these two issues make our case truly singular."

Italy last year spent 69 billion euros servicing the debt, an amount that is twice the size of Slovenia's entire GDP.