Italian govt seeks to cut high public salaries to shore up public accounts against speculation

Italian govt seeks to cut deficit by €25 bln

MILAN — Italians are bracing for spending cuts as the government seeks to put its accounts in order to protect the nation’s high debt load from market speculation.

Parliament is set to approve hotly contested spending cuts on Tuesday, which could include pay freezes for most public workers, but cuts for those highest paid, and may include trims to the nation’s revered health system. The education minister has even suggested starting schools at the end of September instead of the middle of the month, allowing families to take longer vacations and boost tourism.

Finance Minister Giulio Tremonti has pledged to go after high salaries in the nation’s bloated bureacracy, reportedly seeking cuts of 5 percent to those who earn more than €90,000 and 10 percent for those who earn more than €120,000. In addition, freezing public salaries for three years would save €3 billion.

That cuts would cut the deficit by €25 billion ($31 billion), to 2.7 percent of GDP, by 2012. The measure is aimed at keeping Italy’s bond auctions healthy. Despite concern of contagion from Greece, the Treasury has had no trouble covering its bond sales in recent auctions.

Italian officials have cited the fact that about half of Italian bonds are sold domestically as reason to believe its high debt, at about 115 percent of GDP, is stable and less liable to fall prone to market speculation.

Such spending cuts would be welcome by Italian workers, among Europe’s lowest paid with an average salary of €14,700 ($18,000) a year, and the hardest hit in Italy by the crisis, which has idled factories and put many on temporary layoff with reduced compensation.

“In Italy, there are many people who earn too much and it is always those who produce wares and primary goods that make sacrifices,” said Alfonso Perrotta, who was passing out pamphlets last week against the privatization of the public water supply in central Rome. “I agree with the cuts that Tremonti has proposed. It is right that they should pay for this crisis, and not those who conduct honest lives of sacrifices and hard work.”

In Italy, the high debt level maintained by the country has injected cash into the system, creating a false sense of well-being that cannot be sustained, said Bocconi University economist Fabrizio Pezzani.

“We distribute riches without having produced them. This creates a living standard that is above their own possibility. We need to see where we are spending these resouorces, where we are spending badly, and we need to progressively intervene to reduce” the waste,” Pezzani said.

As an example, he cited state spending for daycare, which varies from €6,000 ($7,362) for every child in Modena in the wealthy north, to €15,000 ($18,405) in Palermo, Sicily. The difference becomes a sort of welfare payment that is siphoned off, and clearly not necessary for the real job.

“If I spend €15,000 it is clear I am financing a system of masked welfare. We cannot maintain it,” he said.

Most economists agree Italy’s real issue is finding ways to spur growth, including by loosening up the labor market, and in cutting tax evasion.