Rome

OECD warns Italy on deficit, urges labour-tax cuts

Berlusconi's drive to scrap IMU property tax 'not a priority'

OECD warns Italy on deficit, urges labour-tax cuts

(By Paul Virgo) Rome, May 2 - The Organisation for Economic Co-operation and Development (OECD) on Thursday warned the Italian government to be braced to take action as its deficit situation may be worse than it thinks. The club for wealthy western countries also entered a debate over whether to drop the IMU property tax, an issue which could sink Premier Enrico Letta's fledgling left-right coalition government. OECD Chief Economist Pier Carlo Padoan said Letta's government will need to introduce corrective budget measures if, as the OECD predicts, the country's deficit-to-GDP ratio fails to fall below 3%. Rome is hoping this month to convince the European Commission that it has got the deficit below the 3% threshold allowed by the EU so that it ends an excessive-deficit procedure against the recession-hit country. But the OECD forecast in a report released Thursday that Italy will have a deficit of 3.3% of GDP this year, above the 2.9% forecast by the Italian government. "It will be necessary to do something (if the deficit is over 3%)," Padoan said. "Coming out of the infraction procedure is fundamental". Economy Minister Fabrizio Saccomanni said the OECD's figures did not take account of the positive effect of the government's plan to repay 40 billion euros that the public sector owes private firms over the next 12 months. Saccomanni added that he was still confident the European Commission would end the excessive-deficit procedure. "By the end of May, or at the start of June at the latest, the procedure should be closed," said Saccomanni, who added that this would be an important signal for the financial markets. European Commission President Jose' Manuel Barroso said he was "very confident that Italy will emerge from the excessive-deficit procedure," after meeting Letta in Brussels on Thursday. The OECD report praised the "ambitious programme of reforms" launched last year by the emergency technocrat administration of Letta's predecessor, Mario Monti. It said the country could emerge from its longest recession in two decades later in 2013 as the reforms "have reduced the risks of economic slowdown and could help Italy emerge from the recession in 2013". But it revised down its gross domestic product forecast for this year, saying in the report that it expected Italy to post negative growth of 1.5%. This was 0.5% worse than the OECD predicted in its November outlook. It said Italy should return to growth in 2014, forecasting a 0.5% rise in GDP next year. The OECD also warned that Letta's government must implement Monti's reforms aimed at boosting growth - including controversial measures to make the labour market more flexible by making it easier for firms to dismiss workers. "Key 2012 reforms aimed at improving the dynamism of labour and product markets must be implemented effectively," read a summary of the report. "This will improve Italy's persistently weak productivity and boost the country's international competitiveness". It added that Letta's government should continue with Monti's efforts to restore health to Italy's public finances. "Maintaining fiscal consolidation is key to putting Italy's debt-to-GDP ratio on a downward path over the medium term," added the summary. "Budgetary measures should concentrate on permanent spending cuts to avoid (increasing) already high levels of taxation". The OECD also forecast on Thursday that Italy's massive public debt will rise to 134% of GDP next year. The report said reducing this was a priority because otherwise the country would "remain exposed to sudden changes in the mood of the financial markets". The organisation risked irking ex-premier Silvio Berlusconi's People of Freedom (PdL) party, by saying scrapping IMU should not be a priority for the new government. The PdL is threatening to pull its support from Letta's executive and sink it unless the widely despised tax is abolished. Berlusconi also wants the 2012 revenues collected from IMU returned to taxpayers to respect the key pledge he made in the run-up to February's general election. Letta, a member of the centre-left Democratic Party (PD) that had been in bitter combat with the PdL for two decades before the inconclusive election result forced them to form an unnatural alliance, has said that June's IMU payments would be suspended as part of a review of the tax. But he has not promised to abolish it completely. "If the priorities are growth and jobs, the first thing to cut is labour taxes," Padoan told a press conference. "Reducing labour taxes is more important than reducing IMU". IMU was instituted among a series of austerity measures under former premier Mario Monti's emergency technocrat government to restore health to Italy's public finances. Abolishing IMU and reimbursing the 2012 revenues from it would create a hole of around eight billion euros in this year's budget. Reducing labour taxes is seen by many as a good way to promote job creation, with almost three million Italians unemployed and close to four in 10 young people on the dole.

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