Italy's New Tax, Budget Cuts Aim To Halt Fiscal Crisis

Amid public protest, government hangs tough

By , Staff writer of The Christian Science Monitor

ITALY may be drowning in red ink, but Italia Tagliacozzo has little inclination to throw the country or its government a lifeline.

She and her husband own Magid, a fine-leather-goods shop on Rome's Via Frattina, and she is dead set against a new minimum tax Prime Minister Giulio Amato's government plans to place on Italy's 6 million self-employed.

"What they are doing with this tax is taking away the ambition of the part of Italy that works," says the stylish shopowner, reflecting the antitax posters displayed in her windows showing a boarded-up Italian flag. "It would be a disaster for the hard-working who can't afford what they pay now."

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The proposed minimum tax on the self-employed is just one of the unpopular measures the Amato government is planning or has implemented in its drive to pull Italy back from the brink of financial disaster and to begin bringing down the country's upward-spiraling public debt.

The 1980s, years of economic expansion and high-flying spending by Italy's public sector as well as by consumers, saw the country's public debt soar to more than 100 percent of annual GNP last year. The annual budget deficit, now almost entirely made up of debt payments, hovers just above 10 percent of GNP.

It was this situation, falling behind Europe's stronger economies, and bad news for Italy's hopes of entering monetary union with the European Community by the end of the decade that caused the lira's summer crisis and forced the government to pull out of the European Monetary System (EMS) in September.

To correct Italy's wide drift and to ensure against what many leaders fear could be relegation to a back seat in Europe, the Amato government has proposed $70 billion in austerity measures for the 1993 budget.

As could be expected in any country where the public has become accustomed to government largess, budget deliberations have been heated. But parliamentary battles may only get more tortuous when it comes to the minimum tax. An anti-tax rally here last week drew 10,000 angry self-employed. A fuming Milanese shopowner set the tone in a recent prime time TV debate by raising his fist and condemning the measure as "fiscal terrorism" - the latter a word not lightly spoken in Italy.

But as Mr. Amato made clear at a recent press conference to squelch rumors of a retreat, the government intends to see the minimum tax implemented.

If the government is holding firm on the new tax, it is not, according to various officials, so much for the revenue it will generate - about $6 billion a year initially. More important, various government insiders say, are two other roles the tax will play: first as a signal that Italy's legendary tax evasion is no longer a wink-and-snicker matter, and second as an expression of fairness and a boost to social cohesion.

Up to now, most austerity measures have hit wage earners and public workers - those who cannot evade taxes easily - while the country's doctors, lawyers, shopkeepers, and other self-employed continue to skirt taxes to the tune of $40 billion annually, according to a government estimate.

"The effect of this on the social structure, especially at a time when the government is cutting back, is potentially very dangerous," says Antonio Pedone, chairman of Crediop investment bank and an Amato confident who first proposed the idea of some form of minimum tax.

Ms. Tagliacozzo is unimpressed by such arguments. "Maybe some doctors and lawyers get out of paying their taxes, but for the rest of us, with all the paperwork and credit card sales we have, it's impossible," she says. "And if they run us out of business, then we won't be paying taxes for sure."

Still, most observers expect approval of the tax in some form - and expect the Amato government to be around long enough, in a country known for collapsing governments, to get the crucial 1993 budget passed.

"The Amato government may be working with the slimmest majority of any Italian government in 50 years," says Enzo Bartocci, a Rome political scientist, "yet it is allowed to hold on because it is doing necessary things that no one else wants responsibility for, and because the major parties don't want to risk new elections."

Most observers expect Amato to last only until the budget is passed and the lira is brought back into the EMS - at least by January. But some analysts say that should be enough to ensure the start of Italy's stabilization.

"During the next six months, everything is at stake," says Carlo Azeglio Ciampi, president of the Bank of Italy. He particularly warned that the advantages to be drawn from the lira's effective 15 percent devaluation could be lost if inflation, now about 5 percent, rose again.

Mr. Pedone says the devaluation should allow Italian industry to recapture some of its lost domestic market, such as for automobiles. "The excessive level of our costs in relation to our major trading partners should start to be corrected," says Stefano Micossi, director of economic research at Confindustria, Italy's major industry federation.

Mr. Micossi says the economic elements are present for Italy to have a "good" 1993, but he warns that the country's political instability could still dash these hopes well beyond next year.

Noting the general disaffection with the country's mainstream parties and the meteoric rise of Northern Italy's separatist and anti-government leagues, Micossi says, "The disastrous political situation could greatly complicate the economic situation in the next two to three years."

Making a point for the minimum-tax detractors to consider, he adds, "We'll need more working together but less division if we want to avoid disaster."

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