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 005083 
 
SIPDIS 
 
LABOR FOR ILAB 
PARIS ALSO FOR USOECD 
TREAS FOR OASIA HARLOW, CARNES 
STATE PASS CEA 
                       UNCLASSIFIED 
 
PAGE 02        ROME  05083  01 OF 03  171457Z 
STATE PASS FRB FOR GUST 
FRANKFURT FOR WALLAR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EFIN EFIN IT KPRP ITECON KPRP ITECON KPRP
SUBJECT: ITALYS 2003 GOI BUDGET (PART II) 
 
REF: A. ROME 5049 B. ROME 4673 C. ROME 4673 
 
¶1. SUMMARY: THE GOI PRESENTED ITS 2003 BUDGET TO PARLIAMENT 
ON OCTOBER 2.  REVISIONS ARE EXPECTED BEFORE PARLIAMENT 
APPROVES THE BUDGET IN LATE DECEMBER.  THE 2003 BUDGET 
TOTALS E619.1 BILLION (47.4 PERCENT OF GDP), WITH A DEFICIT 
OF E19.6 BILLION (1.5 PERCENT OF GDP). A PACKAGE OF E20 
BILLION (1.5 PERCENT OF GDP) IN SPENDING CUTS IS PARTLY 
OFFSET BY A STIMULUS PACKAGE OF E7.5 BILLION (0.4 PERCENT 
OF GDP) IN TAX CUTS AND INVESTMENTS IN INFRASTRUCTURE. 
DEFENSE MINISTRY SPENDING CUTS WILL NOT REQUIRE CUTS IN 
SPENDING ON PURCHASES OF U.S. EQUIPMENT, ACCORDING TO 
DEPUTY FINANCE MINISTER BALDASSARI AND FINANCE UNDER 
SECRETARY TANZI.  FINANCE MINISTER TREMONTI DECLARED THAT 
 
SIPDIS 
THIS 2003 BUDGET CAREFULLY BALANCES THE NEED TO STIMULATE 
ECONOMIC GROWTH, COMPLY WITH STABILITY PACT TARGETS AND 
FULFILL PROMISES OF TAX CUTS.  THE RESULT HAS DRAWN HARSH 
CRITICISM FROM ALL SIDES, PERHAPS INDICATING THAT THE 
BUDGET PAIN IS FAIRLY DISTRIBUTED. (REF A) END SUMMARY. 
 
¶2. AFTER APPROVAL BY THE COUNCIL OF MINISTERS ON SEPTEMBER 
30, THE GOI PROPOSED BUDGET FOR 2003 - TOTALING 619.1 
BILLION EURO (47.4 PERCENT OF GDP) - WAS PRESENTED TO 
PARLIAMENT ON OCTOBER 2. E199 BILLION (15.2 PERCENT OF GDP) 
                       UNCLASSIFIED 
 
PAGE 03        ROME  05083  01 OF 03  171457Z 
IS EARMARKED FOR DEBT SERVICE PAYMENTS, LEAVING E420 
BILLION (32.2 PERCENT OF GDP) FOR OTHER GOI SPENDING.  THE 
ESTIMATED DEFICIT IS E19.6 BILLION (1.5  PERCENT OF GDP). 
 
¶3.  FINANCE MINISTER TREMONTI PROPOSED A BUDGET THAT 
T 
COMBINES SPENDING CUTS OF E20 BILLION (1.5 PERCENT OF GDP) 
WITH TAX CUTS EQUAL TO E7.5 BILLION (1.5 PERCENT OF GDP). 
THE E20 BILLION DEFICIT REDUCTION PACKAGE INCLUDES E8 
BILLION IN DIRECT SPENDING CUTS AND E12 BILLION IN REVENUE 
INCREASES.  IN PARTICULAR, PROJECTED REVENUES TO REDUCE THE 
DEFICIT INCLUDE EIGHT BILLION EUROS FROM A LIMITED AMNESTY 
FOR INCOME TAX EVADERS AND FOUR BILLION EUROS FROM 
SECURITIZED ASSETS AND FROM THE SALES OF PUBLICLY-OWNED 
REAL ESTATE.  (NOTE: DEPUTY FINANCE MINISTER MARIO 
BALDASSARRI TOLD US THAT THE GOI PLANS TO REDUCE GENERAL 
GOVERNMENT SPENDING FROM 47 TO 42 PERCENT OF GDP BY 2006. 
END-NOTE). 
 
¶4. SPECIFIC STIMULUS MEASURES INCLUDE: 
 
-- TAX CUTS: THESE INCLUDE E5.5 BILLION IN TAX CUTS FOR 
FAMILIES EARNING LESS THAN E25,000 ANNUALLY. CORPORATE 
TAXES WOULD BE CUT FROM 36 TO 34 PERCENT, AND THE GOI WOULD 
TAKE THE FIRST STEP TOWARD ABOLISHING IRAP, A REGIONAL TAX 
ON BUSINESS, WAGES AND INCOME THAT EARNS THE GOI E9.5 
BILLION ANNUALLY. 
 
-- STIMULUS MEASURES: THESE INCLUDE INCENTIVES FOR 
HOUSEHOLD CONSUMPTION (CREDIT CARDS PAYMENTS, INSTALLMENT 
PAYMENTS AND PURCHASE OF HOUSEHOLD APPLIANCES). ALSO 
                       UNCLASSIFIED 
 
PAGE 04        ROME  05083  01 OF 03  171457Z 
POSSIBLE IS EXTENSION UNTIL 2003 OF THE 36 PERCENT TAX 
CREDIT FOR EXPENSES RELATED TO HOME REMODELING. 
 
-- INFRASTRUCTURE INVESTMENT:  E354.3 MILLION IN 
INFRASTRUCTURE INVESTMENT, WITH PARTICULAR FOCUS ON KEY 
PROJECTS THAT ARE CRUCIAL FOR ECONOMIC GROWTH AND HAVE 
FUTURE REVENUE STREAMS GUARANTEED TO REPAY THE COST OF 
INVESTMENT. 
 
-- PENSIONS:  THE MONTHLY MINIMUM PENSION OF E516 WILL BE 
EXTENDED TO THE 202,000 ITALIAN CITIZENS LIVING ABROAD. 
THERE WILL ALSO BE INCENTIVES FOR EMPLOYEES TO WORK BEYOND 
THE NORMAL ITALIAN RETIREMENT AGE OF 58 YEARS AND 37 YEARS 
OF SENIORITY. 
 
-- SUBSIDIES TO THE SOUTH: THE GOI WILL CREATE A FUND TO 
FINANCE COMPANIES NEW INVESTMENTS IN SOUTHERN ITALY 
COUPLED WITH PROGRAMS TO HELP THE ABSORPTION CAPACITY OF 
THE SOUTH. AT THE SAME TIME, GRANTS FOR COMPANIES OPERATING 
IN THE SOUTH WILL BE CONVERTED INTO TWENTY-YEAR LOW- 
INTEREST LOANS.  DEPUTY MINISTER BALDASSARRI EXPLAINED THAT 
THIS SHOULD BENEFIT MORE EFFICIENT COMPANIES. 
 
-- R AND D: THE GOI WILL PROVIDE AN ADDITIONAL E300 MILLION 
 
                       UNCLASSIFIED 
 
                           UNCLASSIFIED     PTQ0030 
 
PAGE 01        ROME  05083  02 OF 03  171457Z 
ACTION EUR-00 
 
INFO  LOG-00   NP-00    AGRE-00  AID-00   CEA-01   CIAE-00  CTME-00 
      DODE-00  ITCE-00  DOTE-00  ANHR-00  SRPP-00  EB-00    EXME-00 
      E-00     FAAE-00  UTED-00  VC-00    FRB-00   H-01     TEDE-00 
      INR-00   ITC-01   LAB-01   L-00     VCE-00   MMP-00   AC-01 
      NSAE-00  NSCE-00  OIG-03   OMB-01   OPIC-01  ACE-00   SP-00 
      IRM-00   SSO-00   SS-00    STR-00   TEST-00  USIE-00  FMP-00 
      LBA-00   DRL-02   G-00     NFAT-00  SAS-00     /012W 
                  ------------------F936E1  171458Z /38 
P 171415Z OCT 02 
FM AMEMBASSY ROME 
TO DEPT OF TREASURY WASHDC PRIORITY 
SECSTATE WASHDC PRIORITY 6391 
INFO USDOC WASHDC 
DEPT OF LABOR WASHDC 
EU MEMBER STATES COLLECTIVE 
USEU BRUSSELS 2851 
AMCONSUL MILAN 
AMCONSUL FLORENCE 
AMCONSUL NAPLES 
AMCONSUL FRANKFURT 
 
UNCLAS SECTION 02 OF 03 ROME 005083 
 
SIPDIS 
 
LABOR FOR ILAB 
PARIS ALSO FOR USOECD 
TREAS FOR OASIA HARLOW, CARNES 
STATE PASS CEA 
                       UNCLASSIFIED 
 
PAGE 02        ROME  05083  02 OF 03  171457Z 
STATE PASS FRB FOR GUST 
FRANKFURT FOR WALLAR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EFIN EFIN IT KPRP ITECON KPRP ITECON KPRP
SUBJECT: ITALYS 2003 GOI BUDGET (PART II) 
 
INCREASE FOR UNIVERSITY RESEARCH AND DEVELOPMENT. 
 
-- WELFARE: THE TERM FOR UNEMPLOYMENT BENEFITS WILL DOUBLE 
FROM SIX TO TWELVE MONTHS (AT AN ANNUAL COST OF E782 
MILLION). 
 
¶5.  SPECIFIC SPENDING CUTS AND NEW REVENUE MEASURES 
INCLUDE: 
 
-- TAX AMNESTIES: THE GOI WILL GIVE A LIMITED AMNESTY TO 
INCOME TAX EVADERS, WHO MAY PAY A FINE RATHER THAN THE 
TOTAL AMOUNT OF TAXES OWED.  ALSO UNDER CONSIDERATION IS A 
TAX AMNESTY FOR BUILDERS WHO HAVE BUILT WITHOUT A PERMIT. 
THE TAX AMNESTY FOR THE REPATRIATION OF CAPITAL WILL BE 
EXTENDED THROUGH JUNE 30, 2003, AFTER WHICH TIME THE FINE 
WILL BE INCREASED FROM 2.5 TO 4 PERCENT. (THROUGH JULY 
2002, ITALIANS REPATRIATED E50 BILLION, GENERATING TAX 
REVENUES OF E1.25 BILLION.) 
 
-- SPENDING CUTS: PUBLIC PROCUREMENT (AS A PERCENT OF GDP) 
WILL BE CUT FROM 38.1 PERCENT IN 2002 TO 37.6 PERCENT IN 
¶2003.  THIS WILL BE DONE BY REQUIRING EACH MINISTRY TO CUT 
BY TEN PERCENT ITS COSTS FOR PURCHASES OF GOODS AND 
SERVICES, WITH INCREASED RELIANCE ON ON-LINE PURCHASING. 
                       UNCLASSIFIED 
 
PAGE 03        ROME  05083  02 OF 03  171457Z 
THE FINANCE MINISTRY CLAIMS TO HAVE CUT ITS 2002 
EXPENDITURES FOR GOODS AND SERVICES BY 40 PERCENT THROUGH 
USE OF ON-LINE PURCHASING (REFTEL). 
 
-- EDUCATION:  SPENDING CUTS OF E242.2 MILLION IN THE 
EDUCATION SECTOR, MOSTLY ON SALARIES AND BENEFITS FOR 
TEMPORARY AND SUBSTITUTE TEACHERS. 
 
-- REGIONAL AND MUNICIPAL GOVERNMENT MEASURES: REGIONAL TAX 
RATES WILL BE FROZEN FOR 2003. CENTRAL GOVERNMENT TRANSFERS 
TO THE REGIONS WILL BE CAPPED AT NOT MORE THAN THE GOI 
TARGETED INFLATION RATE (1.4 PERCENT) OVER THEIR 2002 
SPENDING, EXCLUDING THE TRANSPORTATION AND HEALTH SECTORS. 
MUNICIPAL AND PROVINCIAL GOVERNMENT DEFICITS WILL BE CAPPED 
AT NOT MORE THAN 3.6 PERCENT OVER THEIR 2001 DEFICIT 
LEVELS.   MUNICIPAL GOVERNMENTS THAT EXCEED THIS CAP WILL 
IN THEORY BE REQUIRED TO FREEZE HIRING AND REDUCE SPENDING 
ON GOODS AND SERVICES.  AT THE SAME TIME, THE CENTRAL 
GOVERNMENT WILL INCREASE THE PERCENTAGE VALUE ADDED TAX 
(VAT) REVENUES TRANSFERRED TO MUNICIPAL GOVERNMENTS FROM 
4.5 PERCENT TO SIX PERCENT. 
 
MACRO ASSUMPTIONS OF THE 2003 BUDGET 
------------------------------------ 
 
¶6.  FINANCE MINISTER TREMONTI EXPLAINED TO PARLIAMENT, WHEN 
PRESENTING THE 2003 BUDGET, THAT HE HAD USED THE EU 
ESTIMATES IN THE OFFICIAL BUDGET DOCUMENT, ALTHOUGH THESE 
WERE CLEARLY OVERLY OPTIMISTIC.  THESE INCLUDED PREDICTIONS 
OF 0.6 PERCENT GDP GROWTH IN 2002, 2.3 PERCENT GROWTH IN 
2003, AND 2.9 PERCENT IN 2004. INFLATION ESTIMATES WERE 1.7 
                       UNCLASSIFIED 
 
PAGE 04        ROME  05083  02 OF 03  171457Z 
PERCENT OF GDP FOR 2002 (70 BASIS POINTS BELOW THAT OF THE 
CONSENSUS FORECAST  REF B), AND 1.4 PERCENT FOR 2003.  THE 
2002 DEFICIT ESTIMATE WAS 2.1 PERCENT, WHILE THE 2003 
ESTIMATE WAS 1.5 PERCENT. (NOTE: ITALYS PUBLIC DEFICIT 
INCREASED TO 40.9 BILLION EURO THROUGH SEPTEMBER 2002, UP 
P 
38 PERCENT OR 11.2 BILLION EURO FROM THE CORRESPONDING 
PERIOD IN 2002. END NOTE.) 
 
EVERYONE UNHAPPY WITH 2003 BUDGET 
--------------------------------- 
 
¶7.  THE GOIS BUDGET PROPOSAL HAS PROVOKED CRITICISM FROM 
SUCH DIVERSE GROUPS AS THE OPPOSITION CENTER-LEFT 
POLITICIANS, REGIONAL GOVERNMENTS, UNION LEADERS, INDUSTRY 
LEADERS AND MANY ECONOMISTS.  THE COMPLAINTS WERE AS VARIED 
AS THE SPEAKERS.  CRITICS CLAIMED THAT TAX CUTS WERE TOO 
SMALL, TOO LARGE OR WRONGLY DIRECTED. THEY ARGUE THAT 
REGIONAL AND MUNICIPAL GOVERNMENTS WOULD RECEIVE TOO 
LITTLE, OR TOO MUCH.  THE SOUTH WAS BEING CUT OFF FROM 
NECESSARY FUNDING OR PROVIDED WITH EXCESS FUNDS. 
 
¶8.  TAX CUTS: THE CENTER-LEFT POLITICAL OPPOSITION, LEFT- 
WING CGIL UNION LEADERS, AND SOME ANALYSTS ARGUE THAT 
 
                       UNCLASSIFIED 
 
                           UNCLASSIFIED     PTQ0029 
 
PAGE 01        ROME  05083  03 OF 03  171458Z 
ACTION EUR-00 
 
INFO  LOG-00   NP-00    AGRE-00  AID-00   CEA-01   CIAE-00  CTME-00 
      DODE-00  ITCE-00  DOTE-00  ANHR-00  SRPP-00  EB-00    EXME-00 
      E-00     FAAE-00  UTED-00  VC-00    FRB-00   H-01     TEDE-00 
      INR-00   ITC-01   LAB-01   L-00     VCE-00   MMP-00   AC-01 
      NSAE-00  NSCE-00  OIG-03   OMB-01   OPIC-01  ACE-00   SP-00 
      IRM-00   SSO-00   SS-00    STR-00   TEST-00  USIE-00  FMP-00 
      LBA-00   DRL-02   G-00     NFAT-00  SAS-00     /012W 
                  ------------------F936F6  171458Z /38 
P 171415Z OCT 02 
FM AMEMBASSY ROME 
TO DEPT OF TREASURY WASHDC PRIORITY 
SECSTATE WASHDC PRIORITY 6392 
INFO USDOC WASHDC 
DEPT OF LABOR WASHDC 
EU MEMBER STATES COLLECTIVE 
USEU BRUSSELS 2852 
AMCONSUL MILAN 
AMCONSUL FLORENCE 
AMCONSUL NAPLES 
AMCONSUL FRANKFURT 
 
UNCLAS SECTION 03 OF 03 ROME 005083 
 
SIPDIS 
 
LABOR FOR ILAB 
PARIS ALSO FOR USOECD 
TREAS FOR OASIA HARLOW, CARNES 
STATE PASS CEA 
                       UNCLASSIFIED 
 
PAGE 02        ROME  05083  03 OF 03  171458Z 
STATE PASS FRB FOR GUST 
FRANKFURT FOR WALLAR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EFIN EFIN IT KPRP ITECON KPRP ITECON KPRP
SUBJECT: ITALYS 2003 GOI BUDGET (PART II) 
 
PROPOSED TAX CUTS FOR LOW-INCOME WORKERS WILL NOT HELP THE 
POOREST ITALIANS.  ANTONIO DAMATO, PRESIDENT OF 
CONFINDUSTRIA (THE INDUSTRIALISTS ASSOCIATION) DECLARED 
THAT TAX CUTS FOR ALL ITALIANS (TO THE 23 AND 33 PERCENT 
NT 
RATES PROMISED BY BERLUSCONI) SHOULD ALREADY BE IN PLACE. 
DAMATO WAS PARTICULARLY ANGERED BY THE ELIMINATION OF SOME 
TAX CREDITS FOR COMPANIES. 
 
¶9.  INCENTIVES FOR THE SOUTH:  THE OPPOSITION CENTER-LEFT 
CRITICIZED THE CHANGE FROM GRANT TO LOANS, AND THE 
ELIMINATION OF OTHER INCENTIVES FOR SOUTHERN ITALY. OTHER 
CRITICS ARGUED THAT THE CONTINUED PROVISION OF HUGE 
SUBSIDIES TO SOUTHERN ITALY WAS IRRESPONSIBLE.  DEPUTY 
FINANCE MINISTER BALDASSARRI ARGUED THAT THE 2003 BUDGET 
PROVIDES E9.9 BILLION FOR THE SOUTH IN 2003, A 27.5 PERCENT 
INCREASE OVER THIS YEARS LEVELS IF EU STRUCTURAL FUNDS ARE 
INCLUDED. 
 
¶10.  CAPPING REGIONAL AND MUNICIPAL GOVERNMENT SPENDING: 
REGIONAL GOVERNMENTS, INCLUDING THOSE LED BY CENTER-RIGHT 
POLITICIANS, ARGUED THAT THE CAP ON THEIR EXPENDITURES 
COULD MEAN DENIAL OF SERVICES TO CITIZENS. PRIME MINISTER 
BERLUSCONI RESPONDED: SPENDING LEVELS ARE THE SAME AS LAST 
                       UNCLASSIFIED 
 
PAGE 03        ROME  05083  03 OF 03  171458Z 
YEAR.  THE LOCAL MACHINE WILL CONTINUE TO PROVIDE ALL THE 
SERVICES THAT IT SHOULD. 
 
. 
 
¶11.  STRUCTURAL REFORMS: CENTRAL BANK GOVERNOR ANTONIO 
FAZIO DECLARED THAT GOI HAD NOT INCLUDED URGENTLY-NEEDED 
STRUCTURAL REFORMS IN THE 2003 BUDGET, INCLUDING TOUGH 
MEASURES TO CUT THE DEFICIT AND ITALYS PUBLIC DEBT. 
CONFINDUSTRIAS DAMATO AGREED, ARGUED THAT THE 2003 BUDGET 
CONTAINED NEITHER IMPROVEMENTS NOR SIGNS OF STRUCTURAL 
REFORMS.  HE SAID HE HAD HOPED TO SEE MORE BUDGET 
DISCIPLINE IN A COUNTRY WITH THE HIGHEST PUBLIC DEBT IN 
EUROPE THAT UNFORTUNATELY IS GROWING. (NOTE: ITALYS 
PUBLIC DEBT IS ONE-FOURTH OF THE OVERALL DEBT OF THE EURO 
AREA. IN THE 2003 BUDGET, THE GOI POSTPONES PLANS TO REACH 
THE 100 PERCENT DEBT/GDP RATION UNTIL 2005. 
 
COMMENT 
------- 
 
¶12.  THE BERLUSCONI GOVERNMENT HAD HOPED TO HAVE SERIOUS 
ECONOMIC REFORMS IN PLACE BY NOW.  FINANCE MINISTER 
TREMONTIS ORIGINAL, POST-ELECTION PROGRAM CALLED FOR 
IMPLEMENTATION OF MAJOR TAX REFORM IN 2002 AND PENSION 
REFORM SOON AFTERWARD.  HOWEVER, THE CONTINUED GLOBAL 
DOWNTURN, COMBINED WITH CONCERN THAT POSSIBLE ACTION IN 
CTION IN 
IRAQ COULD DRAG THE WORLD ECONOMY DOWN EVEN FURTHER, HAS 
COMPLICATED MATTERS.  TAX REVENUES ARE DOWN SUBSTANTIALLY, 
WHILE THE GOI HAS FOUND IT VIRTUALLY IMPOSSIBLE TO CUT 
                       UNCLASSIFIED 
 
PAGE 04        ROME  05083  03 OF 03  171458Z 
SPENDING. 
 
¶13.  STRUCTURAL ADJUSTMENT, MOVING FORWARD SLOWLY BEHIND 
THE SCENES, IS NOT A FACTOR IN THIS BUDGET.  MAJOR TAX AND 
PENSION REFORMS ARE BEING SHAPED BEHIND THE SCENES FOR 
¶2004.  PRIVATIZATION HAS SLOWED TO A CRAWL, PARTLY BECAUSE 
OF WEAK INTERNATIONAL PRICES FOR SUCH ASSETS. 
 
¶14.  THE 2003 BUDGET IS THEREFORE A DIFFICULT COMPROMISE. 
FINANCE MINISTER TREMONTI IS SEEKING TO COMBINE FISCAL 
STIMULUS (TO AVOID A FURTHER SERIOUS DOWNTURN) WITH SMALL 
CUTS IN CENTRAL GOVERNMENT SPENDING AND POLITICALLY 
DIFFICULT CAPS ON REGIONAL AND MUNICIPAL SPENDING.  THE 
FACT THAT THIS BUDGET PLEASES ALMOST NO ONE MAY BE THE BEST 
ARGUMENT THAT THE PAIN IS FAIRLY DISTRIBUTED. 
SEMBLER 
 
                       UNCLASSIFIED 
 
> 
 2002ROME05083 - Classification: UNCLASSIFIED