Bank of Italy wants austerity plan monitored

The Bank of Italy warned yesterday that the government's revamped austerity plan must not cut back on its original €45.5 billion (US$65.9 billion) proposal to raise taxes and cut spending, and said even with the plan, Italy risked economic stagnation.

Premier Silvio Berlusconi and his allies late Monday issued a revision of the proposed austerity measures after widespread public anger, deciding to scrap special tax on high earners and spare small town governments.

The new measures tinker with retirement age and call for a reduction in the number of lawmakers.

The Bank of Italy's deputy chief Ignazio Visco told parliament committees yesterday that he hoped the market's response to the revision "isn't too penalising".

He said the overall austerity measures "cannot be reduced" and will be monitored to ensure they're being followed.

He warned that regardless of the measures, Italy still risked "a phase" of economic stagnation. Growth might be less than one per cent this year and even less in 2012, making aims for a balanced budget more difficult, he warned.

Pressing for approval

"In the current context, in which the costs of a possible deviation from the goals are very high, the total planned adjustments cannot be reduced," he said.

Berlusconi's allies have insisted the revised plan would help achieve a balanced budget by 2013 as demanded by the European Central Bank.

The government is pressing for approval before the end of September to calm markets.

By yesterday morning, there were already more than 1,000 amendments to the proposal.

The original emergency austerity measures were announced on August 12 on the eve of Italy's big summer holiday.

They called for those earning above €90,000 (US$130,000) to pay an extra five per cent income tax over the next three years, while those over €150,000 (US$215,000) would pay 10 per cent.

Unions and business lobbies charged they penalised honest taxpayers given widespread tax evasion by the self-employed. Monday's huddle scrapped that, though it kept a solidarity tax for lawmakers.

Also yesterday, Italian borrowing rates dropped in a pair of bond sales that easily raised €6.739 billion (US$9.76 billion), thanks largely to the ECB's programme to buy government debt.

Investors demanded interest rates of 5.22 per cent to lend the Italian government some €.759 billion in 10-year bonds, down from 5.77 per cent in a similar auction last month. The Treasury's debt sale yesterday was oversubscribed 1.27 times.

Borrowing rates for three-year bonds dropped to 3.87 per cent, from 4.8 per cent last month.

Italy's borrowing rates - both on the primary and secondary market - have eased since the ECB on August 8 began buying bonds of some Eurozone countries to stem the worsening debt crisis.