Economy seen helping Italy soften budget blow

Italian Prime Minister Romano Prodi's coalition government might be able to make fewer unpopular spending cuts and still meet EU budget demands thanks to greater economic growth and tax collection.
One of Prodi's ministers said on Tuesday the brighter outlook might allow them to reduce cuts in the draft 2007 budget to 30 billion euros from 35 billion, without putting at risk their deficit-cutting commitments with the European Union.
Regional Affairs Minister Linda Lanzillotta said Economy Minister Tommaso Padoa-Schioppa thought 30 billion euros could be enough to get the budget deficit below 3 percent of gross domestic product (GDP) in 2007, as required by the EU.
"The economy minister will revise the trend for the public accounts and improve the forecast," Lanzillotta told local radio Radio Radicale, confirming media reports on the outcome of a working dinner with Padoa-Schioppa late on Monday.
"Tax revenues for July have shown an improvement in (tax) collection," she said. "So to get the deficit ratio under 3 percent in 2007, budget cuts of not 35 billion euros but around 30 billion should be enough."
Last week, Deputy Minister Roberto Pinzi forecast the economy growing between 1.5 and 2.0 percent this year, compared with the 1.5 percent that had been widely expected.
Faster growth helped tax revenues rise 12 percent in the first half of the year.
Prodi's government, which holds a special budget meeting on Thursday, has come under internal pressure from its leftist members to make more gradual cuts and avoid painful reductions to pension and healthcare spending.
But the European Commission expects Italy to meet a 2007 deadline to cut the deficit below the EU ceiling, saying on Monday that any extension would be "incomprehensible". Last month, the government outlined 35 billion euros of savings that would lower the deficit by 20 billion after tax cuts. Focused on health, pensions and government, the plan would mean a deficit of 2.8 percent of GDP in 2007, down from 4 percent expected for this year.