May 24, 2010 / 2:34 PM / 9 years ago

Italy austerity budget to cut wages and hiring

ROME (Reuters) - An austerity budget due to be approved by Italy’s cabinet on Tuesday cuts public-sector hiring and pay, temporarily delays retirement for some state workers and reduces funds to local government.

The two-year package, expected to narrow the 2011 budget deficit by around 13 billion euros (11 billion pound), will be outlined at a news conference late on Tuesday after the cabinet meeting, which starts at 1600 GMT.

A weekend draft of the measures obtained by Reuters said only 20 percent of those who leave the public sector between 2011 and 2013 would be replaced, and it cut transfers to municipal and regional authorities by 2 billion euros in 2011 and 3.8 billion euros in 2012.

The draft budget, which comes as polls show Prime Minister Silvio Berlusconi’s popularity declining, includes cuts in the politically-sensitive area of health spending, trimmed by 0.4 billion euros next year and 1.1 billion euros in 2012.

Spending by government ministries, including pay, is reduced by about percent per year from 2011-13.

Those who would have earned the right to retire in mid-2011 and at the end of 2011, according to the so-called retirement “windows,” must remain at work for a further six months.

According a memo of talking points used by Economy Minister Giulio Tremonti in a speech to the economic committee of Berlusconi’s People of Freedom (PDL) party, the measures will also include an amnesty on some illegal construction.

The memo also says the measures will try to reduce government spending on pharmaceuticals by enacting stricter controls and using more generic drugs in the public health system.

“The deficit cuts will be worth 24 billion (over two years),” said government spokesman Paolo Bonaiuti, reiterating the centre-right government would not raise taxes. “We will not put our hands in the pockets of Italians.”

POLITICAL WINDS

In an effort to crack down on widespread tax evasion, the government will ban the use of cash in transactions over 5,000 euros, lowering the ceiling from 12,500 euros, Tremonti’s memo said.

The deficit cuts, said to be worth around 1.6 percent of Italy’s GDP, are aimed at ensuring the budget deficit falls to below the EU’s 3 percent ceiling by 2012.

It follows financial market concerns in recent weeks over peripheral euro zone countries’ public finances, which has returned Italy to the spotlight.

Italy aims to cut its deficit to 2.7 percent of GDP by 2012 from 5.3 percent last year — well below the EU average — thanks to restraint in stimulus spending during the crisis.

“The budgetary correction envisaged by the government is a step in the right direction,” Unicredit wrote in a report on Monday, adding a return to growth this year would also help to slow growth in welfare spending.

However, the cuts may dent the government’s flagging poll ratings.

A survey published in the Corriere della Sera newspaper on Monday showed the number of Italians who felt Berlusconi’s government had performed “very badly” doubled from a year ago to 26 percent, while 38 percent said it had been a “little disappointing.

“Europe is asking us for strict budget cuts,” said Public Administration Minister Renato Brunetta, adding that there would be a series of meetings before the cabinet to build consensus for the measures.

Union leaders, who have said they are prepared to back the measures as long as they do not unfairly hit the poor, are expected to hold a news conference after the meeting to present their reaction.

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