Italian cabinet heads for hot budget cuts

(MILAN) - The Italian government was due to adopt an austerity programme amid high political tension and market turbulence Thursday to save about 47 billion euros ($68 billion) and reassure investors.

The plan, which still needs to be approved by parliament, is expected to include a 0.15-percent tax on financial transactions, a cut in ministers' pay and an extension of the current freeze on public sector salaries and hiring.

Markets are keeping a close eye on the proposals amid fears of contagion to other parts of the eurozone from the sovereign debt crisis in Greece.

Italy has come in for particular scrutiny because of its high debt and low growth and ratings agencies have warned they could downgrade its credit rating.

The government says it wants to cut the public deficit to 0.2 percent of gross domestic product (GDP) by 2014 from 4.6 percent in 2010 in line with European Union requirements and has urged Italians to unite behind the budget measures.

Ahead of the cabinet meeting, the benchmark FTSE Mib index on the Milan stock exchange was barely in positive territory at plus 0.08 percent.

"The situation in public finances and the low growth forecasts in our country are factors of weakness that make us vulnerable to contagion from the Greek crisis," said Giuseppe Vegas, head of Italy's financial regulator Consob.

The austerity plan "is aimed at avoiding this risk," he said.

A previous 25-billion-euro austerity plan adopted last year sparked a wave of social protests and the government is now in a far weaker position after defeats in local elections and a round of referendums in the past month.

Economy Minister Giulio Tremonti has reportedly threatened to resign if his plan is not adopted -- a move that analysts say could spark market turmoil.

The cabinet meeting "will give a clearer reading of the real political situation inside the ruling majority and of the real fate awaiting Tremonti," said Stefano Folli, a columnist with Italian business daily Il Sole 24 Ore.

"Either Tremonti manages to impose the plan according to his criteria... If this does not happen it is clear that the risk of the economy minister's resignation remains a rather serious threat," he said earlier this week.

For the government to see out its mandate "there is no choice but to drink every last drop from the chalice of austerity, however painful," he said.

There has been sharp criticism of Tremonti's budget discipline from within the ruling coalition, particularly from the populist Northern League party whose votes Prime Minister Silvio Berlusconi needs to stay in power.

A planned increase in the minimum pension age for women in the private sector to 65 will only be introduced from 2020 after Northern League pressure.

The government is also expected to launch an overhaul of the tax system that would reduce income tax and crack down on tax exemptions and evasion.

"Today in the middle of a crisis that continues to come from Greece, we have to continue. We have no alternative," Tremonti said ahead of the meeting.

But Marco Valli, an economist with Italy's largest bank UniCredit, said investors would likely to "weigh the risks on implementation of the plan".

Many of the budget measures in the draft plan are planned for 2013 and 2014 -- after the mandate of the current government runs out in 2013.

Italy has one of the highest public debt mountains in the world -- equivalent to around 120 percent of GDP -- but it has managed to retain market confidence by keeping its deficit lower than in some other EU economies.

Moody's ratings agency earlier this month however said it could downgrade Italy's rating, a month after a similar warning by Standard and Poor's.

Italian bond yields rose sharply in the wake of the rating agency reports but these fell back on Wednesday after the adoption of Greece's austerity plan.

Italy's biggest trade union, the CGIL, has said it is ready to mobilise its members against the austerity plan saying the measures are "intolerable".