IMF sees 'modest' Italy pick-up, deficit overshoot

Italian economic growth will come in below the government's target this year and the budget deficit will exceed the European Union's 3 percent of GDP limit, the International Monetary Fund said on Wednesday. In its annual 'Article IV' report on Italy, the IMF said tax cuts worth some 5.8 billion euros ($7.41 billion) pushed through by Prime Minister Silvio Berlusconi for 2005 should have been either tied to additional structural spending cuts or delayed.
"The 2005 fiscal adjustment - with a small decline in the overall deficit and a limited decline in one-off measures -again falls short of what is needed," the report said.
The IMF's Mission Chief for Italy, Carlo Cottarelli, said in a conference call that the tax cuts were unlikely to boost growth because "they would need to be accompanied by cuts to spending to be seen as sustainable in the longer term".
The government's 2005 budget contained measures worth some 29 billion euros aimed at funding the tax cuts and lowering the deficit to 2.7 percent of GDP from a targeted 2.9 percent last year.
The IMF forecast this year's deficit at 3.1 percent of GDP and urged Rome "to be prepared to adopt structural measures over the course of 2005" to ensure its 2.7 percent objective is met.
Cutting Italy's huge debt pile is also proceeding too slowly, Cottarelli said, as the Fund forecast this year's debt-to-GDP ratio at 104.4 percent, compared with a government goal of 104.1 percent.
Cottarelli suggested the 2005 deficit could be reined back in the course of the year by limiting public sector salary rises and increasing charges for health and other public services. Economy Minister Domenico Siniscalco had to adopt a deficit cutting "mini-budget" worth some 7.5 billion euros almost as soon as he took office last July after his predecessor Giulio Tremonti was ousted by coalition infighting.
Thanks to those measures the 2004 deficit should come in line with the government's 2.9 percent target, the IMF said.
But, echoing concerns from the European Commission, the IMF also called for improved fiscal transparency from Italy, in order to clarify the reason for the large gap between the fiscal deficit and the public sector borrowing requirement.