The Italian government said on Friday it had discovered a five billion euro hole in its public finances next year, requiring fresh deficit-cutting measures just one month after it presented the 2006 budget.
Economy Minister Giulio Tremonti announced new measures to plug the gap at a news conference and said Italy would still meet its 2006 deficit target of 3.8 percent of GDP.
The latest developments underline the growing problems Italy faces in trying to get public finances in order. Only two weeks ago, Silvio Berlusconi's government approved a 1.9 billion euro emergency package of measures to try to meet this year's deficit goal of 4.3 percent. Recent data showed the deficit stood at 5.1 percent in the first six months of 2005.
The five billion euros ($6.07 billion) of new measures announced on Friday raise the budget's deficit cut to 16.5 billion euros from an original 11.5 billion.
The Treasury later issued a statement to explain what had changed since last month, when Tremonti said the 11.5 billion euro budget cut would suffice to reach 3.8 percent.
After the budget had been drafted it became clear that Tremonti's predecessor Domenico Siniscalco had pencilled in 6 billion euros of "hidden" property sales for 2006 which could not realistically be achieved, the statement said.
"On the one hand we can say it's positive that the government seems to be making an effort to meet its target even in an election year," said Deutsche Bank economist Susana Garcia. Berlusconi faces a general election in April 2006.
"But at the same time the new measures adopted are not very clear, and the fact that they keep moving the goalposts means that the whole process isn't very credible," Garcia added.
Tremonti said the 2006 budget, the 2005 mini-budget and the measures announced on Friday should be seen as "a precise strategy", and that next year's budget was now "more solid".
The budget must be approved by parliament by the end of the year, and could still undergo substantial modifications.
Analysts surveyed by Reuters after the original budget was drawn up forecast on average that the 2006 deficit would rise to 4.5 percent of GDP rather than fall to 3.8 percent.
It remains to be seen if the additional measures will allay the risk that Italy's sovereign debt will soon be downgraded by ratings agencies, a move expected by many analysts.
Standard and Poor's and Fitch both lowered Italy's ratings outlook to negative from stable during the summer, saying a sound 2006 budget was vital for future ratings developments. S&P rates Italy's sovereign debt AA- while Fitch rates it at AA.
Tremonti said 1.5 billion euros of the additional 5 billion would come from lower transfers to the railways and to road-management agency ANAS, and another one billion would come from higher than anticipated dividends from partly public energy companies ENI and ENEL.
The remaining 2.5 billion comes from a series of revenue raising moves including a crackdown on so-called dividend washing by companies, tightening tax breaks on real estate leasing and increasing taxation of the Bank of Italy.
Opposition leader Romano Prodi said in a newspaper interview on Friday that if he wins the election, the first thing he would do would be to set up an independent body to assess the real size of the budget hole left by the centre-right government.
While financial markets and ratings agencies eye Italy for signs of fiscal laxity, Tremonti is being lambasted at home by trade unions, local governments and even fellow ministers for his budget spending cuts.
Actors and musicians have staged protests and Culture Minister Rocco Buttiglione has threatened to quit unless Tremonti drops planned cuts to the arts budget, while generals say the army will be hard-pressed to maintain its international commitments under the 2006 plans. Trade unions are to hold a general strike against the budget on November 25 and regional and municipal governments say they will have to cut services due to the government's plans to reduce transfers by 3.1 billion euros.
Renato Soru, the founder of internet company Tiscali and President of the Sardinian regional government, on Friday threatened to take the government to court over transfers he said it owed to Sardinia.
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