Italy's budget

Those who were listening to BBC Radio Solent at 7am UK time this morning (OK, not that many, I admit), could have heard my dulcet tones explaining what is going on in Italy.

There was a small riot outside the Parliament building as they passed the budget; at least it was small by Roman standards. Some imaginative soul threw a pig's heart (although the Corriere della Sera says it was a veal heart: I think we should be told; an end to cover-ups!) but otherwise not much. The savings to be made, which are about double those being made in the UK, are, to a large extent agreed by Italians. They are persuaded, in my view correctly, that without these savings Italy would not be able to stay in the euro.

I think it important to think a little about the Italian psyche here, and it applies to the budget and to the Berlusconi case which is warming up nicely (more later). The Italians are not a nation of economists and they are not a nation of puritans. What is of great concern to Italy is the way the world sees it, its bella figura. They believe they must be a part of the euro not for some technical reasons - anyone who knows the least bit of the mechanics of the thing thinks they are mad to stay in - but because they want to retain a seat at the top table. Equally Berlusconi can get up to whatever he pleases until it  gets to the point that he is bringing down Italy (and I believe it may be getting to that point now).

So, there must be savings and there will be suffering. What the disagreement is about, and it is shared by the left and by the Confederation of Industry and by the ordinary people, is that it is too much in the way of taxes and not enough in the way of cuts. In fact, of the €54 billion in the budget, around two thirds is increased taxes and one third is cuts. VAT goes up by 1% immediately.

The reasons for the mistrust of the balance of this manovra are twofold: firstly, as Emma Marcegaglia of Confindustria says tirelessly, Italy's problem is lack of growth. Italy needs government expenditure cuts - in many areas the State chokes out private enterprise - it needs a sell off of State owned assets which amount to many billions and are only there as pieces on the political chessboard, and it needs an overall reduction in day to day costs of the State, a reduction in payroll and a general reduction in activity.

The other side of the argument, held by the left and by the ordinary folk, is that Italy needs to tackle its vested interests. In many ways the budget is targeted at ordinary people and leaves the rich off the hook. A VAT increase hits a family trying to clothe its children, it does not hit the rich and powerful, who don't pay much in the way of income tax either.

This blog agrees with both views: the budget should have been 75% cuts and sell-offs and efficiency drives, and the remaining 25% could have been covered easily by making the ruling class pay its taxes. Many people think they might have done well to copy Mr Cameron and be seen to reduce the costs and numbers of MPs. Vested interests again, and there's no one with the balls to tackle them.