ITALY'S Prime Minister Romano Prodi persuaded his divided cabinet to pass a draft 2007 budget on Friday after more than 10 hours of talks in which some parties in his coalition had threatened revolt, Reuters reported. “It's a courageous budget that doesn't hit family income and helps growth thanks to lower labor costs,” Prodi told a news conference after talks where left-wingers insisted on an income tax hike that centrists said would “savage” middle class voters. Economy Minister Tommaso Padoa-Schioppa said the budget would cut Italy's growing deficit by 14.8 billion euros ($18.74 billion) and reduce it to 2.8 percent of GDP, below the European Union's 3 percent cap for the first time in five years. “Now we have the certainty that we will fully respect our commitments to Brussels,” Padoa-Schioppa said. Italy has regularly missed its deficit targets since qualifying for monetary union in the late 1990s and its public finances are under the scrutiny of both the European Commission and ratings agencies. Standard & Poor's and Fitch both have a negative outlook on Italy's debt and are likely to downgrade their ratings if not convinced by the budget's moves to improve the country's competitiveness and finances. The government on Friday raised its forecast for this year's deficit to 4.8 percent of GDP from 4.0 percent in response to a recent European Court of Justice ruling obliging it to reimburse value added tax to purchasers of company cars. During the Cabinet talks, Prodi, whose coalition of socialists, communists, and centrists narrowly beat Silvio Berlusconi's centre right at an April election, faced threats of mutiny. TAX HIKE Parties on the left held out for more spending on education, health and the environment while centrists tried to block a plan to increase income tax for higher earners. Deputy Economy Minister Vincenzo Visco said taxes had been raised for high earners but declined to give details on the new rates. Ahead of the meeting, a centrist government party, Udeur, said it would block Visco's proposal to lower the income threshold on which the top 43 percent tax rate is applied to 70,000 euros per year from 100,000 euros. Visco said the income threshold for the top tax rate would be lowered but would be higher than 70,000 euros. He said full details of the tax changes would only be made available on Saturday. On top of the 14.8-billion-euro deficit cut, an additional 18.6 billion euros is earmarked to cover measures to boost growth, including a 6-billion-euro cut to labour taxes. Overall a total of 33.4 billion euros needs to be found through spending cuts and extra revenues contained in the draft budget. “I didn't think we would achieve this result, I think it is extraordinary because it gets us out of an emergency and opens up prospects for the future,” Padoa-Schioppa said. The belt-tightening measures involve central and local government, the pension system, health spending and higher taxes, Padoa-Schioppa said, though he offered little detail Even though the cabinet agreed the package, the slimness of Prodi's parliamentary majority means he may have to accept watering down of the budget, which has to be passed by lawmakers by the end of the year.
