Italy announces £20.8 billion cuts plan

Ministers have approved £20.8 billion in budget cuts for 2011-2012 to protect Italy from the market speculation that pushed Greece to the brink of bankruptcy.

The measures seek to reduce the budget deficit to below 3% of gross domestic product by 2012, down from 5.3% last year.

The government said the measures focused on reducing public spending for both Italy's highly-paid politicians and public administration as well as on fighting tax evasion, a major revenue drain.

Prime minister Silvio Berlusconi and finance minister Giulio Tremonti will hold a news conference today on the measures.

They call for a three-year wage freeze for public workers and pay cuts for highly-paid civil servants, the government said. There also are measures to reduce bureaucracy, help the underdeveloped south and crack down on disability benefit cheats.

But the measures must be passed by parliament, where there could be political fights waged. The head of the powerful CGIL union Guglielmo Epifani said earlier yesterday that the cuts focused too much on workers.

Italy's measures are among cuts under way across Europe as the continent tries to convince markets that it can manage its debt load and avoid another near-default like Greece.

The cuts would bring the deficit in line with the treaty governing the eurozone and soothe markets worried about the debt load of 115% of GDP - the highest of the 16 countries that use the euro.

In Spain, billions in cuts to civil servants' salaries go into effect next month and the Socialist government has frozen some retirement pensions starting next year, eliminating cost-of-living increases.

France is raising the retirement age and Portugal is raising taxes from June 1, among other measures.

Germany will decide next month just how to cut at least £2.6 billion from the budget, including possible fresh cuts to once-sacred unemployment benefits.

On Monday Britain unveiled £6 billion in cuts - mostly to government salaries and expenses.

On Monday Gianni Letta, one of Mr Berlusconi's most-trusted aides, stressed the importance of Italy's measures.

"We are forced to make very heavy and difficult sacrifices, I hope in a provisional way, to save our country from the Greek risk," he said in L'Aquila, according to news agency ANSA.

Italian consumer confidence deteriorated in May and is expected to remain weak in the next few months as households prepare themselves for the painful austerity measures, Raj Badiani of IHS Global Insight said.

From a sovereign debt perspective, Mr Badiani said Italy was still deemed less risky than Greece, Portugal or Spain, because investors are accustomed to Italy's high debt level and the Italian banking sector appears to be sound with a higher dependence on retail deposits than in other countries.

"Italy appears to be less vulnerable in the near term than other Club Med economies, but its protracted cycle of modest growth and high debt needs to be broken in the medium term," he said.

The impending cuts are catching many Italians off-guard, after having been assured as recently as early as April by both Mr Berlusconi and Mr Tremonti that Italy would be able to exit the crisis without drastic measures.