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Italian budget

May 26, 2010

While some economists may applaud Italy's proposed 24 billion-euro austerity package for preventing a Greece-level debt crisis, the cutbacks could take a toll on Prime Minister Berlusconi's already declining popularity.

Euro notes stuffed in a sock
The savings must still be approved by Italy's parliamentImage: picture-alliance/ZB

Italy's government ministers have approved a plan to cut 24 billion euros from its 2011-2012 budget, a move aimed at shoring up investor confidence and preventing a Greece-style economic decline.

If approved by parliament, the measure would help the government trim its budget deficit from 5.3 percent of gross domestic product (GDP) to 2.7 by 2012. European Union regulations require member states to keep budget deficits within 3 percent of GDP, although many countries have broken the rules since the economic and financial crises.

Italy's need for austerity measures is not as extreme as those of Greece, Spain or Portugal. The proposed cuts are thus less harsh than similar actions taken in those countries, but they are still likely to maintain the relative stability of Italian government bonds - at least for now.

Political risk

Economists are likely to praise Italy for its willingness to cut back spending at a time when it is politically unpopular to do so. Indeed, Italian Prime Minister Silvio Berlusconi has seen a recent drop in his approval rating, which remained high despite the country's worst economic recession since World War Two.

The prime minister's popularity has dropped dramatically in the last yearImage: AP

A poll by the ISPO agency released Monday showed 35 percent of Italians thought the government had performed well, a large drop from 50 percent a year ago.

Berlusconi has considerable sway over his country's media, owning three of Italy's main commercial television channels and having control over state broadcaster RAI. But his famous communication skills may not be enough to win over Italians, some of whom may be seeing smaller paychecks.

Wage freezes

Berlusconi is to hold a news conference Wednesday with Finance Minister Giulio Tremonti to officially announce the proposal.

Berlusconi carries considerable weight in the mediaImage: picture-alliance / dpa

The measures include a freeze on public sector wages for three years, a plan to replace only one in every five public sector employees who leave their jobs and deep cuts in city and regional government budgets. Workers who have earned retirement rights would also be forced to work an extra six months, but the average retirement age of around 61 remains unchanged.

Other money-saving ideas, such as a 10 percent cut in ministers' salaries, have been under discussion.

The government announced that in addition to reducing spending, it would take greater steps to fight tax evasion.

acb/AFP/AP/Reuters
Editor: Mark Hallam

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