Italy's Letta presses on after coalition tensions

ROME Thu Jul 4, 2013 6:15pm BST

Italy's Prime Minister Enrico Letta (R) arrives to meet Pope Francis as he is flanked by father Georg Gaenswein during a meeting at the Vatican July 4, 2013. REUTERS/Alessandro Bianchi

Italy's Prime Minister Enrico Letta (R) arrives to meet Pope Francis as he is flanked by father Georg Gaenswein during a meeting at the Vatican July 4, 2013.

Credit: Reuters/Alessandro Bianchi

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ROME (Reuters) - Italian Prime Minister Enrico Letta said on Thursday he was confident that his fractious left-right coalition was on the right path after a meeting aimed at easing tensions over its halting progress on economic reforms.

"There's a good relaunch of the government and of the government programme. I'm optimistic and we are on the right path," Letta said after a clear-the-air meeting called when the centrist Civic Choice movement threatened to withdraw support if economic reforms were not stepped up.

According to an official at the meeting, Letta agreed to speed up clearing a backlog of bills the state has racked up with companies by accelerating plans to pay off 40 billion euros ($51.89 billion) in arrears over the next two years.

But there was little progress on two other contentious issues, the unpopular IMU housing tax, which the centre-right People of Freedom party (PDL) want to scrap, and plans to stop a planned one percentage point increase in sales tax.

"We need to find a solution for sales tax and IMU within the 2013 budget, which is still rigid and does not have flexibility. The funding for these measures must be found within the deficit parameters and it's not simple," Letta said.

The coalition partners are now due to meet in a fortnight's time for further assessments.

Letta has pledged to ease the severe austerity policies pursued by predecessor Mario Monti's government and cut a youth unemployment rate of around 40 percent, while respecting the tight spending limits imposed by European Union budget rules.

But progress has been hampered by tensions in the coalition between Letta's centre-left Democratic Party (PD) and the PDL, the two rivals that were forced together by the deadlocked national elections in February.

On Thursday, the International Monetary Fund warned that accelerating reforms was essential if Italy is to restore growth to an economy which the Fund forecast would contract by 1.8 percent this year.

NO EARLY ELECTIONS

For the moment, there is little expectation of a return to elections, not least because the result would almost certainly be another deadlocked parliament.

But with Italy, the euro zone's third largest economy, in its longest recession since World War Two, Letta can ill afford major splits if he is to push through significant reforms and keep the badly strained budget under control.

Italy expects its fiscal deficit to come in just under the EU's limit of 3 percent of output this year but its debt is one of the highest in the euro zone at over 130 percent of gross domestic product.

The issue of the invoice arrears, a longstanding source of complaint from cash-strapped companies which struggle to raise loans from banks, is only one of the pressing problems linked to the public finances.

Scrapping the housing tax would tear a 4-billion-euro hole in the budget and many economists, including those at the IMF, believe the levy is preferable to taxes on labour or investment and should be retained.

There are similar problems over plans to cancel the planned rise in sales tax, originally due to come into effect in July but now postponed for three months.

Economy Minister Fabrizio Saccomanni has announced plans for a review of public spending but admitted on Wednesday that major cuts would require tough political decisions and, in the short term, the room for manoeuvre was limited.

Making its own contribution to the budget, the opposition 5-Star Movement of comic Beppe Grillo, which regularly attacks waste and corruption in the political system, announced that its 156 parliamentarians were repaying 1.5 million euros in unspent daily expense allowances.

($1 = 0.7709 euros)

(Additional reporting By Naomi O'Leary and Giuseppe Fonte; Editing by Steve Scherer and Michael Roddy)

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