Italian PM loses face in budget battle

ANDREW GUMBEL

Rome

Italy's Prime Minister, Lamberto Dini, yesterday faced a serious challenge to his political authority after a package of deficit-cutting budget proposals for next year was given a luke-warm reception by business leaders, the media and international financial markets.

Mr Dini's measures, announced midweek, to cut spending and increase revenue by a total of 32,500bn lire (pounds 13bn) for 1996 were described as over-optimistic, imbalanced and unequal to the task of bringing the country's economy into line with European Union plans for economic union.

Such reaction, reflected in drops in value for the lira and Italian shares on the financial markets, augured badly for the Italian government on the eve of the European finance ministers' meeting in Valencia, which was set to discuss the prospects for a single currency by the end of the century. Italy is seen as one of the most doubtful cases.

It also set the stage for a bruising autumn in the Italian parliament, when politicians will scrutinise not only the arithmetic of Mr Dini's budget but also the broader economic and political prospects for the country.

The aim of Mr Dini's package was to cut the public sector deficit from 7.4 per cent of gross domestic product to 5.9 per cent, and to cut the overall debt-GDP ratio from its record level of 124 per cent to something nearer 120 per cent. Neither target is anywhere near the EU convergence requirements of 3 per cent and 60 per cent respectively.

However, economists questioned the financial basis of the targets, saying they depended on the Italian economy continuing to grow at its current rate of 3 per cent per year, interest rates falling from 10 per cent to 8.5 per cent, and inflation falling from 5.8 per cent down to about 5 per cent by the end of the year and 3 per cent in 1996.

Most forecasts suggest, by contrast, that the economy will slow down while interest rates and inflation will continue to be problems.

There was criticism, too, for Mr Dini's arithmetic on new revenues, with most observers doubting he could recover 5,000bn lire (pounds 2bn) simply by cracking down on tax evasion.

Mr Dini has a reputation as a safe pair of financial hands, but this budget appears to have shown up the limitations of his technocratic mandate, partly because he does not have the political clout to introduce radical measures such as across-the-board tax hikes, and partly because he has his own political future to think about.

Mr Dini has tried to appeal to his key centre-left support with a pay hike for public sector workers. However, his more natural allies on the centre-right are growing ever more suspicious as they fear that his popularity could take the wind out of their sails. Former prime minister Silvio Berlusconi's Forza Italia party is talking about abstention on the budget unless certain changes are made.

Mr Dini himself is hoping the budget will be no more than a final hurdle to his ultimate aim of leading the country into general elections next year. But pressure from within and the Eu could spell the end of banker's brief political career.