Italy's coalition issues package of measures to boost economy

Italy's fragile coalition government has closed ranks around a budget-neutral decree intended to boost the recession-hit economy while putting off decisions on controversial tax cuts.

Enrico Letta, the centre-left prime minister, announced a package of some 80 measures on Saturday night after a difficult cabinet meeting lasting nearly six hours. Earlier he assured Jose Manuel Barroso, president of the European Commission, that Italy would keep to its target of a 2.9 per cent budget deficit this year.

"That means not racking up debt but making economic, social and fiscal policy choices while parsimoniously managing public resources," Mr Letta said after meeting Mr Barroso.

The measures were the first aimed at energising the economy since Mr Letta's Democrats and the centre-right led by former prime minister Silvio Berlusconiformed a coalition seven weeks ago to end the deadlock resulting from an inconclusive election in late February.

Dressed up as anti-austerity measures the package largely focuses on cutting bureaucracy and streamlining the civil justice system, while reshuffling existing financial resources, including the prioritisation of infrastructure projects costing €3bn that the government said would create 30,000 jobs.

A tax on yachts under 14 metres imposed by Mario Monti's previous technocrat government was also abolished. Private and business consumers will see total savings of €550m on their electricity bills, partly through cuts in subsidies for renewable energy and some utilities.

Mr Berlusconi's People of Liberty party was pleased with moves to trim the powers of Equitalia, Italy's draconian tax collection agency, so that it can no longer impose a lien on first homes for people facing tax debts of up to €120,000.

"We are waking up. This government is showing signs of life," commented Renato Brunetta, economics spokesman for the centre-right, rejecting an editorial in the Financial Times last week that criticised "Letta's lethargy".

"The government is stronger for this decree," Mr Brunetta added. The decree is expected to take effect within days but must be approved by parliament within two months to become law.

Nonetheless the coalition remains divided over centre-right demands that a tax on first homes imposed by Mr Monti be abolished, and cancellation of an increase in sales tax due to come into force on July 1.

Centre-right politicians have said their continued support for the coalition is conditional on these demands but Fabrizio Saccomanni, finance minister, has said that funds do not exist to cover the €8bn cost over a year. The housing tax payment has been deferred to August 31, and Mr Brunetta said he expected the sales tax increase to be delayed until the autumn when the whole VAT system is to be reviewed.

Economists doubt Italy can stick to its deficit target without further corrective measures, possibly amounting to €20bn, following nearly two years of recession that shows few signs of ending. The government's forecast of a 1.3 per cent fall in GDP this year is widely regarded as over optimistic.

Economists Alberto Alesina and Francesco Giavazzi say public spending must be cut by at least €8bn, and criticised Mr Saccomanni's reluctance to bite the bullet. "We are back at the beginning. Taxes and spending, a policy that has brought us to the brink of collapse," they wrote in the daily Corriere della Sera on Sunday.

A senior official, who declined to be named, said the government was in a bind - constrained by its political fragility to take decisive steps that would include serious spending cuts, asset sales and privatisations, but blocked by Brussels from increasing its deficit. The government was still relying on economic recovery starting by the end of the year but, he admitted, such a hope could be misplaced.

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