Bloomberg News

Monti Says Budget Changes Will Boost Fairness, Sway Investors

December 15, 2011

Dec. 14 (Bloomberg) -- Prime Minister Mario Monti said an agreement to ease pension cuts and a new property tax will make his emergency budget plan fairer, and its passage will convince investors Italy can slash the euro region’s second-biggest debt.

“We are confident that markets will react positively to the efforts Italy is making, maybe not tomorrow, but the reduction in borrowing costs that we anticipate in the coming months will help spur the economy,” Monti told a parliamentary committee in Rome last night.

Monti, in office less than a month, proposed the 30 billion-euro ($39 billion) package of austerity and growth measures as he tries to show investors he can bring down borrowing costs and tame a debt that is bigger than that of Spain, Greece, Portugal and Ireland combined. Yesterday he accepted changes to the plan proposed by lawmakers in a bid to build support for the measure before it goes to a vote in Parliament this week.

The premier praised input from lawmakers that led to the amendments proposed by his government yesterday. The plan will be changed to raise the threshold on pensions that will be stripped of cost-of-living increases to about 1,400 euros a month in 2012, from less than the 1,000 in the original package. The minimum pension is about 500 euros. Families paying the new property tax will get a 50-euro credit per child, the amendment says. Italians whose checking accounts average less than 5,000 euros a year will no longer have to pay a 34-euro annual tax.

Lost Revenue

The government will cover the lost revenue by increasing the planned levy on Italians who took advantage of previous amnesties on tax evasion. The amendment will also add a tax surcharge on pensions of more than 200,000 euros a year and will impose a levy on property owned by Italians outside of Italy.

The yield on Italy’s 10-year bond fell more than 80 basis points in the two days after Monti announced the measures on Dec. 4. Bonds have given back those gains after European Union leaders failed to come up with a comprehensive fix for the region’s debt crisis at a summit ended Dec. 9. The jump in yields is boosting the cost of financing Italy’s 1.9 trillion- euro debt, and the Treasury had to pay 5.952 percent to sell one-year debt on Dec. 12, about three times what Germany pays to borrow for 10 years.

Tax Increases

Monti acknowledged that the tax increases and spending cuts in the plan may hurt economic growth in the short run.

“The alternative was a deepening of the sovereign debt crisis that wouldn’t have just led to a recession but the destruction of wealth and the evaporation of the income of Italians,” Monti told the budget committee in the Chamber of Deputies.

The premier defended the plan from criticism that salaried workers and pensioners, rather than the wealthy, will bear most of the burden from the austerity measures. His government had considered implementing a wealth tax, but determined that it wouldn’t have generated enough revenue in the short term and would have led to capital flight from Italy, he said.

The reintroduction of the property tax, higher levies on the funds pardoned in previous tax amnesties and steeper fees on bank and trading accounts were all elements that would affect the wealthy more than wage earners.

“We have introduced a wealth tax that was doable, the wealth tax that was possible,” he said.

The Chamber of Deputies will begin its debate on the plan once it’s passed by the budget committee and is due to vote on the package this week. The measure then passes to the Senate where debate is set to start on Dec. 21 with a vote by Dec. 23.

--Editors: Kevin Costelloe, Jim Silver

To contact the reporters on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net;

To contact the editors responsible for this story: Tim Quinson at tquinson@bloomberg.net. Craig Stirling at cstirling1@bloomberg.net;


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