Italy’s Renzi Loosens the Reins on Spending

Having barely made an effort to shrink the state, Italy’s reformist premier starts talking about stimulus.

Italian prime minister Matteo Renzi arrives in Brussels to attend a European Council summit, March 6, 2014
Italian prime minister Matteo Renzi arrives in Brussels to attend a European Council summit, March 6, 2014 (European Council)

It seems Italy is preparing to loosen the reins on spending again after barely making an effort to shrink the public sector.

Prime Minister Matteo Renzi announced on Friday €1.8 billion had been found “left on the side” and would be used to finance new stimulus measures.

€6 billion short

While unveiling the government’s annual economic plan, Renzi said €10 billion worth of budget cuts would take effect next year, bringing cumulative savings for the 2014-16 period to €28 billion.

But that is €6 billion short of the original three-year plan set out by Italy’s former spending tsar in 2014 plan, the Financial Times reports.

Carlo Cottarelli, a former director of the International Monetary Fund, resigned in October because of differences with Renzi’s government over his spending strategy.

Committed

Officials told the same newspaper Renzi is “fully committed” to making cuts.

Specifically, money would come from consolidating public procurement, reforming the public administration, more efficient infrastructure investment, slashing corporate subsidies and limiting unjustified welfare expenditure.

However, the absence of detailed plans and the fact that the economy is growing again — at .7 percent this year after three years of recession — raises doubts. Will Renzi really not relent as leftwingers in the Democratic Party complain about liberalizations while his pact with the conservative opposition to enact electoral reforms lies in tatters?

Concessions to the left

A reformist social democrat, Renzi has faced down opposition from within his coalition over labor reforms that aim to close the divide between full-time workers who are almost impossible to fire and mostly younger workers on insecure contracts.

But to keep the left of his party and its trade union allies on board, those changes will only apply to new hires and do little to open up closed professions, such as lawyers, notaries, pharmacists and taxi drivers.

Much remains to be done

The third largest economy in the eurozone is among few where labor costs continued to rise during the crisis.

It also still costs more than the average annual income to start a business in the country.

Renzi canceled €3.3 billion in planned tax cuts last year to meet the European Union’s deficit target. But he simultaneously delayed plans to bring Italy’s shortfall into structural balance until 2017.

The national debt, equivalent to more than 130 percent of yearly economic output, far exceeds the European average.

More opposition

Next to resistance from Democrats, who feel Renzi is veering too far to the right, the premier must cope with more hostile opposition from the right.

An agreement with former prime minister Silvio Berlusconi to jointly overhaul Italy’s voting system had kept Forza Italia relatively quiet. Now that the deal is off the table, Renzi can expect bitter fights in parliament.

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