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Letta says his budget can’t be everyone’s ‘Father Christmas’

PRIME Minister Enrico Letta told critics of his 2014 budget on Friday that Italy still needed to demonstrate its credibility to wary financial markets, rejecting calls for steeper tax cuts and more measures to stimulate growth.

Speaking as the lower house of parliament in Rome passed a procedural confidence motion on the budget, Letta said the government had done all it could to help investment while maintaining control of public finances.

“We and Europe are both still under observation,” he told reporters in Brussels where he was attending a summit of European Union leaders. “We absolutely have to maintain the same care that the father of a family does. I say that to everyone in Italy who wants Father Christmas instead.”

The lower house of parliament passed the confidence motion, a standard measure used to speed legislation, ahead of a separate vote to approve the package later in the day. The Senate is due to complete parliamentary approval on Monday.

The budget, which keeps Italy’s public deficit just within the EU ceiling of 3 per cent of GDP this year, trims some taxes on employment and replaces the hated IMU housing levy.

But it has been widely criticised for not doing enough to cut spending and help growth.

Letta’s coalition, based around the centre-left Democratic Party and a smaller centre-right group led by Interior Minister Angelino Alfano, is more confident of being able to pass reforms since a break with former Prime Minister Silvio Berlusconi, who quit the government last month.

But it faces a huge challenge in turning around an economy which has shrunk by more than 9 per cent since 2007, with youth unemployment running at over 40 per cent and an industrial infrastructure which has crumbled during the crisis.

The mildly expansionary budget makes minor adjustments to current spending and revenue trends, but with the government determined to banish any doubts about the solidity of public finances, its room for manoeuvre has been severely limited.

Confindustria, Italy’s main business lobby, has been particularly critical of the government’s failure to act more decisively to cut the so-called “tax wedge” – the difference between employers’ labour costs and a worker’s take home pay.

The budget foresees a reduction in the tax wedge of just over 2.5bn euros in 2014 and 3bn in 2015, which it intends to fund partly out of spending cuts, well short of Confindustria’s call for 10bn euros in tax cuts.

However there has already been growing concern that resources originally earmarked to balance tax cuts may be diverted to fund urgent spending priorities such as unemployment benefit funds.

The government expects Italy’s budget deficit to fall to 2.5 per cent of output in 2014 from a targeted 3.0 per cent this year, on the assumption that the economy grows by 1.1 per cent.

That growth forecast is widely considered optimistic and the public debt is seen rising to almost 133 per cent of output this year and next, second only to Greece’s in the euro zone.

The budget envisages some 4bn euros in spending cuts and 7.3bn euros in additional revenues this year, set against 13.9bn euros in new spending commitments, leaving a fiscal gap of some 2.6bn euros.

In addition to the tax wedge cut, the IMU tax on primary residences will be replaced by a new tax on municipal services which will go towards funding cash-strapped local authorities.

Sales of publicly owned buildings are expected to raise 1.5bn euros over three years, while top pensions will be held back and a series of tax breaks will be reorganised. But a spending review under former IMF official Carlo Cottarelli, expected to bring 11.3bn euros of cuts by 2017, will not begin to produce results until 2015.

One source of extra income that has been contested in Italy and abroad is a tax aimed at raising revenue from online multinationals which currently pay their levies in low-tax countries like Luxembourg, Ireland or outside the EU.

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