Italy to cut spending by 26b euros over three years

ROME: The Italian government agreed overnight Thursday on a series of measures to slash public spending by 26 billion euros ($32 billion) over three years, including major payroll cuts.

"The economies in this measure will be 4.5 billion (euros) in 2012, 10.5 billion in 2013 and 11 billion in 2014," said Prime Minister Mario Monti.

Much of the savings will be found in the health and public administration budgets, said Monti.

Deputy Economy Minister Vittorio Grilli said the planned measures would lead to a 20 percent reduction in the number of public sector managers and a 10 percent cut in the ranks of ordinary public sector workers.

Such cuts will further upset the country's trade unions and heighten the threats of strikes.

In April, the government had decided in principle to cut 4.2 billion euros off this year's spending account, but now Rome sees the need for deeper cuts.

Monti said the cuts were needed to avoid a two percentage point hike in sales tax which would otherwise be necessary.

The Italian cabinet met for seven hours before reaching agreement on the measures, a sign of the difficulty the government is having in finding areas in the budget from which the savings can be extracted without hitting services, and public sentiment, too hard.

"We wanted to avoid across-the-board cuts, preferring a more complex but more effective plan," said Monti.

The measures are the fruit of a report by Piero Giarda, the parliamentary relations minister, charged by Monti with carrying out a spending review.

Among the other budget cuts envisaged is a 50 percent reduction this year in spending on the official car pool.

The government also decided to cut 200 million euros from university grants this year and 300 million euros in successive years.

The regions will also see their payments cut while retired civil servants will no longer be offered paid consultation work by the government.

Monti warned this week that Italy's public deficit would be a worse than the expected 2.0 percent of gross domestic product (GDP) this year instead of a previous forecast of 1.3 percent.

The official data agency Istat said deficit numbers were up because of increased debt interest spending due to higher rates on the debt markets and because of lower tax revenues due to the recession.

Italy's economy entered recession in the second half of last year and the government is forecasting a contraction of 1.2 percent this year.

Italy's 10-year bond yield climbed back above 6.0 percent on Thursday as tension returned to the markets.