This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 ROME 003551 
 
SIPDIS 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
LABOR FOR ILAB 
PARIS ALSO FOR USOECD 
                       UNCLASSIFIED 
 
PAGE 02        ROME  03551  01 OF 03  180615Z 
TREAS FOR OASIA -HARLOW, JONES 
STATE PASS CEA 
STATE PASS FRB FOR GUST 
FRANKFURT FOR WALLAR 
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 
4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN ELAB EFIN ELAB EFIN ELAB IT KPRP ITECON KPRP ITECON KPRP
SUBJECT: ITALY: 4-YEAR FINANCIAL PLAN 2003-2006 
 
REF: A) ROME 2958; B) ROME 2794 
 
¶1.   SUMMARY. ITALY IS UNLIKELY TO ELIMINATE ITS DEFICIT 
BEFORE 2005, ACCORDING TO THE GOI'S RECENTLY RELEASED 
FOUR-YEAR BUDGET PLAN (DPEF).  GOI PLANS FOR SUBSTANTIAL 
TAX CUTS AND INFRASTRUCTURE INVESTMENT, COMBINED WITH 
LESS OPTIMISTIC ECONOMIC ASSUMPTIONS, LIKELY RULE OUT A 
BALANCED BUDGET BEFORE 2005.  AN EU OFFICIAL EXPRESSED 
CONCERN, AS DID SOME ITALIAN ECONOMISTS, THAT ITALY HAD 
POSTPONED THE BALANCED BUDGET BY ONE YEAR. NONETHLESS, 
THE GOI EXPECTS THE TAX CUTS AND INVESTMENT TO GENERATE 
ECONOMIC GROWTH, AND ANTICIPATES STEADY IMPROVEMENT IN 
FISCAL AND OTHER ECONOMIC INDICATORS OVER THE NEXT 
SEVERAL YEARS.  END SUMMARY. 
 
¶2.  THE GOVERNMENT OF ITALY'S FOUR-YEAR BUDGET PLAN 
(DPEF), WHICH OUTLINES BUDGET PRIORITIES AND 
ASSUMPTIONS, WAS APPROVED BY THE COUNCIL OF MINISTERS ON 
JULY 5 AND PRESENTED TO PARLIAMENT ON JULY 10. THE 
DOCUMENT MUST BE REVIEWED BY PARLIAMENT BEFORE THE 
                       UNCLASSIFIED 
 
PAGE 03        ROME  03551  01 OF 03  180615Z 
SUMMER RECESS IN LATE JULY OR EARLY AUGUST.  THE DPEF 
PREVIEWS THE 2003 FINANCIAL LAW THAT WILL BE PRESENTED 
TO PARLIAMENT IN LATE SEPTEMBER. 
 
¶3.  ITALY WILL NOT REACH ITS BALANCED BUDGET TARGET BY 
2004, BUT INSTEAD IN 2005.  PRIME MINISTER BERLUSCONI 
RECENTLY ANNOUNCED GOVERNMENT PLANS TO REDUCE CORPORATE 
AND PERSONAL INCOME TAXES BY SEVEN BILLION EURO IN 2003. 
THE DPEF DOES NOT INDICATE SPECIFIC SPENDING CUTS TO 
OFFSET THIS LOSS IN TAX REVENUE, BUT MENTIONS A DEFICIT 
REDUCTION PACKAGE "AROUND ONE PERCENT OF GDP", EQUAL TO 
EURO 12.5 BILLION. THE GOI EXPECTS THE DEFICIT/GDP RATIO 
TO BE 1.1 PERCENT AT THE END OF 2002 AND TO DECLINE TO 
0.8 PERCENT AT END-2003. 
 
DPEF 2003-1006 
-------------- 
 
¶4.   THE KEY ECONOMIC ASSUMPTIONS IN THE DPEF ARE: 
 
-- REAL GDP GROWTH OF 1.3 PERCENT IN 2002, 3 PERCENT IN 
2003-2004 AND 3.1 PERCENT IN 2005-2006;  (NOTE: THIS MAY 
BE TOO OPTIMISTIC.  THE LATEST CONSENSUS FORECAST 
ASSUMES 1.2 PERCENT GROWTH IN 2002. A HIGHER LEVEL WOULD 
REQUIRE A STRONG RECOVERY IN THE SECOND HALF OF 2002.) 
 
-- DEBT FALLING STEADILY FROM 109.4 PERCENT OF GDP IN 
2001 TO 95 PERCENT IN 2006, AS PART OF A LONG-TERM PLAN 
TO REACH THE EMU TARGET OF 60 PERCENT BY 2011;  (NOTE: 
THE 2001 DPEF, FOR 2002-2005, ASSUMED A 95 PERCENT 
TARGET IN 2004.) 
                       UNCLASSIFIED 
 
PAGE 04        ROME  03551  01 OF 03  180615Z 
 
-- TAX BURDEN FALLING, AS A PERCENT OF GDP, FROM 42.4 
PERCENT IN 2001 TO 39.8 PERCENT IN 2006, MOSTLY IN FAVOR 
OF LOWER INCOME HOUSEHOLDS AND SMALL AND MEDIUM-SIZED 
COMPANIES. 
 
-- TAX CUTS, THE FIRST TRANCHE OF WHICH EXEMPTS FROM 
TAXES INCOMES BETWEEN 6,197 EURO (3,098 EURO FOR SELF- 
EMPLOYED) TO 10,329 EURO, AND REDUCES TAX RATES FROM 24- 
32 PERCENT TO 23 PERCENT (FOR INCOMES RANGING FROM 
10,329 TO 30,987 EURO). 
 
-- INFLATION BELOW 2 PERCENT PER YEAR, DECELERATING FROM 
2.7 PERCENT IN 2001, TO 1.7 PERCENT IN 2002, 1.4 PERCENT 
IN 2003 AND 1.2 PERCENT IN 2006;  (NOTE:  A 1.7 PERCENT 
INFLATION RATE FOR 2002 WOULD BE 50 BASIS POINTS BELOW 
THE JUNE LEVEL OF 2.2 PERCENT, 70 BASIS POINTS BELOW THE 
2.4 AVERAGE FOR THE FIRST HALF OF 2002 AND 60 BASIS 
POINTS BELOW THE LATEST CONSENSUS ESTIMATES OF 2.2 
PERCENT FOR 2002.) 
 
-- INFRASTRUCTURE INVESTMENT INCREASING, PRIMARILY IN 
 
                       UNCLASSIFIED 
 
                           UNCLASSIFIED     PTQ1434 
 
PAGE 01        ROME  03551  02 OF 03  180615Z 
ACTION EUR-00 
 
INFO  LOG-00   AID-00   CIAE-00  CTME-00  DODE-00  ITCE-00  WHA-00 
      EAP-00   EB-00    EXME-00  E-00     UTED-00  FOE-00   VC-00 
      FRB-00   H-01     TEDE-00  INR-00   ITC-01   VCE-00   AC-01 
      NSAE-00  OMB-01   OPIC-01  ACE-00   SP-00    SSO-00   STR-00 
      TEST-00  TRSE-00  USIE-00  FMP-00   DRL-02   G-00     SAS-00 
        /007W 
                  ------------------CCD00A  180615Z /20 
P 180531Z JUL 02 
FM AMEMBASSY ROME 
TO DEPT OF TREASURY WASHDC PRIORITY 
SECSTATE WASHDC 4945 
INFO USDOC WASHDC 
DEPT OF LABOR WASHDC 
EU MEMBER STATES COLLECTIVE 
AMEMBASSY OTTAWA 
USEU BRUSSELS 2745 
AMEMBASSY TOKYO 
AMCONSUL MILAN 
AMCONSUL FLORENCE 
AMCONSUL NAPLES 
AMCONSUL FRANKFURT 
 
UNCLAS SECTION 02 OF 03 ROME 003551 
 
SIPDIS 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
LABOR FOR ILAB 
PARIS ALSO FOR USOECD 
                       UNCLASSIFIED 
 
PAGE 02        ROME  03551  02 OF 03  180615Z 
TREAS FOR OASIA -HARLOW, JONES 
STATE PASS CEA 
STATE PASS FRB FOR GUST 
FRANKFURT FOR WALLAR 
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 
4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN ELAB EFIN ELAB EFIN ELAB IT KPRP ITECON KPRP ITECON KPRP
SUBJECT: ITALY: 4-YEAR FINANCIAL PLAN 2003-2006 
 
THE SOUTH; PUBLIC INVESTMENT SPENDING WILL BE ACCOUNTED 
OFF BUDGET THROUGH A NEWLY-ESTABLISHED AUTONOMOUS 
CONTRACTING FIRM FOR LARGE INFRASTRUCTURE PROJECTS. 
 
-- UNEMPLOYMENT, RESULTING FROM ECONOMIC RECOVERY 
COMBINED WITH MEASURES TO INCREASE FLEXIBILITY IN THE 
LABOR MARKET; FALLING FROM 9.5 PERCENT IN 2001 TO 9.1 
PERCENT IN 2002 AND TO 6.8 PERCENT IN 2006.  THE GOI 
ALSO EXPECTS AN INCREASE IN THE LABOR MARKET 
PARTICIPATION RATE FROM 56.3 PERCENT IN 2002 TO 59.6 
PERCENT IN 2006. 
 
-- DEFICIT/GDP RATIO FALLING TO 1.1 PERCENT AT THE END 
OF 2002 AND TO 0.8 PERCENT AT END-2003. 
 
RE-DOING THE BOOKS 
------------------- 
 
¶5.  A RECENT RULING IN BRUSSELS MAY CHANGE GROWTH 
ESTIMATES. IN EARLY JULY, EUROSTAT (THE EUROPEAN BUREAU 
                       UNCLASSIFIED 
 
PAGE 03        ROME  03551  02 OF 03  180615Z 
OF STATISTICS) DECLARED THAT ITALY MAY NOT USE 
BORROWINGS AGAINST FUTURE PROPERTY SALES AND LOTTERY 
REVENUES TO REDUCE THE DEFICIT FIGURE.  AS A RESULT, 
THEY STATED, THE GDP DEFICIT FOR 2001 MUST BE REVISED 
UPWARD - FROM 1.6 TO 2.2 PERCENT OF GDP.  THE RULING 
AGAINST THESE ACCOUNTING METHODS ALSO PUTS PRESSURE ON 
FUTURE TARGETS. 
 
¶6.  ACCORDING TO MARCELLO MESSORI, ECONOMIST AND 
PRESIDENT OF MEFOP (THE GOI INSTITUTION FOR PENSION 
FUNDS), THE EUROSTAT DECISION WILL MAKE IT MORE 
DIFFICULT FOR THE GOI TO SELL SECURITIES BACKED BY 
FUTURE INCOME.  MESSORI  TOLD US THAT THE EUROSTAT 
DECISION HAD BEEN EXPECTED, BUT THAT MOST ITALIAN 
ANALYSTS EXPECTED THAT IT WOULD BE LIMITED TO THE 
SECURITIZATION OF LOTTERY PROCEEDS. 
 
¶7. FINANCE MINISTER TREMONTI HAS AFFIRMED THAT THE GOI 
WILL CONTINUE TO SELL ASSET-BACKED BONDS, VALUED AT 
CLOSE TO SEVEN BILLION EURO, TO REDUCE THE DEFICIT.  THE 
GOI WILL MODIFY THE WAY IT SELLS ASSET-BACKED DEBT, 
WHICH WILL LIKELY BE BACKED BY FEWER PROPERTIES.  (NOTE: 
PREVIOUSLY, THE FACE VALUE OF ASSETS WAS LOWER THAN THE 
VALUE OF THE COLLATERAL-BACKING SUCH ASSETS.  FOR 
EXAMPLE, IN 2001, THE GOI RAISED 2.3 BILLION EURO BY 
SELLING A BOND BACKED WITH 3.2 BILLION EURO IN REAL 
ESTATE.) 
 
PRIVATIZATIONS 
-------------- 
 
                       UNCLASSIFIED 
 
PAGE 04        ROME  03551  02 OF 03  180615Z 
¶8. THE GOI WILL PROCEED WITH PRIVATIZATIONS TO OFFSET 
THE BUDGET SHORTFALL.  ACCORDING TO THE DPEF AND 
GOVERNMENT STATEMENTS, THE FIRST TO BE PRIVATIZED WILL 
BE THE RESIDUAL STAKE OF TELECOM ITALIA (3.46 PERCENT), 
ETI (ENTE TABACCHI ITALIANI  - ITALY'S NATIONAL TOBACCO 
COMPANY) AND 85 PERCENT OF TIRRENIA (MARITIME 
TRANSPORTATION), AS WELL AS ANOTHER TRANCHE OF ENEL 
(ELECTRICITY CONGLOMERATE), TERNA (100 PERCENT ENEL- 
OWNED ELECTRICITY TRANSMISSION COMPANY) AND GESTORE 
DELLA RETE (100 PERCENT ENEL-OWNED ELECTRICITY NETWORK 
MANAGEMENT COMPANY). THE GOI ALSO PLANS TO REDUCE ITS 
STAKE IN ALITALIA OVER THE NEXT 18 MONTHS, "BUT NOT 
BELOW 30 PERCENT".  THE FINANCE MINISTRY OWNS 67.58 
PERCENT OF ENEL AND 62.4 PERCENT OF ALITALIA. 
 
¶9. UNCERTAIN MARKET CONDITIONS HAVE, HOWEVER, RAISED 
QUESTIONS ABOUT BOTH HOW FAST THE GOI WILL PROCEED WITH 
THESE PRIVATIZATIONS AND THE REVENUES THAT WILL BE 
REALIZED.  WHEN THE MARKET RECOVERS, THE GOVERNMENT 
HOPES SALES OF GOVERNMENT-OWNED ENTITIES AND SHARES WILL 
BRING IN 20 BILLION EURO. 
 
                       UNCLASSIFIED 
 
                           UNCLASSIFIED     PTQ1423 
 
PAGE 01        ROME  03551  03 OF 03  180613Z 
ACTION EUR-00 
 
INFO  LOG-00   AID-00   CIAE-00  CTME-00  DODE-00  ITCE-00  WHA-00 
      EAP-00   EB-00    EXME-00  E-00     UTED-00  FOE-00   VC-00 
      FRB-00   H-01     TEDE-00  INR-00   ITC-01   VCE-00   AC-01 
      NSAE-00  OMB-01   OPIC-01  ACE-00   SP-00    SSO-00   STR-00 
      TEST-00  TRSE-00  USIE-00  FMP-00   DRL-02   G-00     SAS-00 
        /007W 
                  ------------------CCCFD6  180613Z /20 
P 180531Z JUL 02 
FM AMEMBASSY ROME 
TO DEPT OF TREASURY WASHDC PRIORITY 
SECSTATE WASHDC 4946 
INFO USDOC WASHDC 
DEPT OF LABOR WASHDC 
EU MEMBER STATES COLLECTIVE 
AMEMBASSY OTTAWA 
USEU BRUSSELS 2746 
AMEMBASSY TOKYO 
AMCONSUL MILAN 
AMCONSUL FLORENCE 
AMCONSUL NAPLES 
AMCONSUL FRANKFURT 
 
UNCLAS SECTION 03 OF 03 ROME 003551 
 
SIPDIS 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
LABOR FOR ILAB 
PARIS ALSO FOR USOECD 
                       UNCLASSIFIED 
 
PAGE 02        ROME  03551  03 OF 03  180613Z 
TREAS FOR OASIA -HARLOW, JONES 
STATE PASS CEA 
STATE PASS FRB FOR GUST 
FRANKFURT FOR WALLAR 
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 
4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN ELAB EFIN ELAB EFIN ELAB IT KPRP ITECON KPRP ITECON KPRP
SUBJECT: ITALY: 4-YEAR FINANCIAL PLAN 2003-2006 
 
THE DPEF DEBATE 
--------------- 
 
¶10.  THE EU COMMISSION HAD BEEN KEEPING A CLOSE EYE ON 
ITALY'S BUDGET AND HAD SAID REPEATEDLY THAT IT EXPECTED 
A GOI BUDGET CLOSE TO BALANCE IN 2003 AND IN BALANCE IN 
¶2004.  THUS, EU REACTION TO THE DPEF ECONOMIC PLAN WAS 
GENERALLY NEGATIVE.  THE SPOKESPERSON FOR EU 
COMMISSIONER FOR ECONOMIC AFFAIRS PEDRO SOLBES SAID THAT 
THE GOI'S 0.8 PERCENT DEFICIT/GDP TARGET FOR 2003 WAS 
TOO HIGH TO BE CONSIDERED "CLOSE TO BALANCE" AS AGREED 
IN THE LAST EU MEETING IN SEVILLE. 
 
¶11.  FINANCE MINISTER TREMONTI RESPONDED UNEQUIVOCALLY 
THAT "WE ARE ABSOLUTELY IN CONFORMANCE WITH THE 
STABILITY PACT."  PRIME MINISTER BERLUSCONI AGREED, 
DECLARING THAT "I DO NOT BELIEVE THAT THERE IS ANY 
CONCERN REGARDING MINISTER TREMONTI'S DPEF, WHICH I 
BELIVE RESPECTS COMPLETELY THE MAASTRICHT PARAMETERS, AS 
WELL AS A FLEXIBLE INTERPRETATION OF THE LIMITS 
                       UNCLASSIFIED 
 
PAGE 03        ROME  03551  03 OF 03  180613Z 
INDICATED BY ECOFIN IN MADRID AND THE EUROPEAN COUNCIL 
IN SEVILLE." 
 
¶12.  ON JULY 15, DURING THE PARLIAMENTARY REVIEW OF THE 
DPEF, THE PRESIDENT OF THE "CORTE DEI CONTI" (ITALY'S 
SUPREME AUDIT COURT) STATED THAT THE GOI WOULD NEED A 
DEFICIT REDUCTION PACKAGE OF E19 BILLION TO BRING THE 
DEFICIT/GDP RATIO TO 0.8 PERCENT IN 2003.  THIS IS WELL 
ABOVE THE E12.5 BILLION LEVEL GIVEN BY DEPUTY FINANCE 
MINISTER BALDASSARRI. 
 
¶13. FORMER TREASURY MINISTER VISCO, OF THE OPPOSITION 
CENTER-LEFT, ECHOED THE CRITICISM, STATING "IT WILL BE A 
HUGE MANEUVER, ALMOST 2 PERCENT OF GDP". 
 
¶14.  CENTRAL BANK GOVERNOR ANTONIO FAZIO ALSO COMMENTED 
TO PARLIAMENT ON THE DPEF.  FAZIO AGREED WITH THE GOI 
THAT TAX CUTS WERE ESSENTIAL AND THAT A GOI PUBLIC WORKS 
PROGRAM SHOULD BE IMPLEMENTED IMMEDIATELY.  HOWEVER, HE 
ALSO DECLARED THAT THE GOI NEEDED TO ACT URGENTLY TO CUT 
HEALTH AND SOCIAL SECURITY EXPENDITURES, INCREASE THE 
RETIREMENT AGE AND, DEVELOP SUPPLEMENTAL PENSION FUNDS. 
FAZIO ALSO CALLED FOR THE REPLACEMENT OF ONE-TIME BUDGET 
MEASURES (SUCH AS ASSET SALES) WITH DURABLE BUDGET 
MEASURES TO CONTROL SPENDING AND ASSURE STABLE REVENUES. 
REGARDING THE DPEF'S MACRO ASSUMPTIONS, FAZIO SAID THAT 
THE 1.3 PERCENT GROWTH THIS YEAR ASSUMES A DRAMATIC FOUR 
PERCENT ACCELERATION DURING THE LAST TWO QUARTERS OF 
¶2002. SUCH GROWTH RATES ARE POSSIBLE ONLY IF A FIVE 
BILLION EURO INFRASTRUCTURE INVESTMENT PROGRAM IS 
IMPLEMENTED DURING THE SECOND HALF OF 2002. 
                       UNCLASSIFIED 
 
PAGE 04        ROME  03551  03 OF 03  180613Z 
 
COMMENT 
------- 
 
¶15.  THE DPEF ASSUMPTIONS OF HIGHER GROWTH AND LOWER 
INFLATION DURING 2002 MAY BE OPTIMISTIC, AND SOME 
SUPPLEMENTAL SPENDING CUTS MAY BE NECESSARY, BUT FINANCE 
MINISTER TREMONTI HAS CREATED A REASONABLY REALISTIC 
DOCUMENT IN HIS 2002 DPEF.  FACED WITH A CHOICE BETWEEN 
BALANCING THE BUDGET BY 2003 OR IMPLEMENTING PROMISED 
TAX CUTS AND INFRASTRUCTURE INVESTMENT, TREMONTI HAS 
CHOSEN THE LATTER.  HE INSISTS, AND CENTRAL BANK 
PRESIDENT FAZIO AGREES, THAT THESE MEASURES ARE 
NECESSARY FOR LONG TERM ECONOMIC GROWTH AND A FISCAL 
BALANCE THAT CAN BE SUSTAINED ONCE REACHED.  FAZIO IS ON 
TARGET WITH HIS CALL FOR FURTHER MEASURES, INCLUDING 
PENSION REFORM, AND DEEPER SPENDING CUTS.  MINISTER 
TREMONTI HAS TOLD US THAT HE AGREES AND HOPES TO CARRY 
THESE OUT IN THE LONGER TERM. 
SEMBLER 
 
                       UNCLASSIFIED 
 
> 
 2002ROME03551 - Classification: UNCLASSIFIED