Italy eases austerity as economy picks up

Italy is easing up on austerity and mulling €1.8bn in new fiscal stimulus measures, as Matteo Renzi, the prime minister, banks on an economic rebound to help restore battered public finances.

Mr Renzi said some money was "left on the side" as he unveiled the annual economic plan on Friday. The government will decide in the next few weeks how the extra funds - earmarked for helping low-income families - will be used.

The prime minister also said that €10bn worth of spending cuts would take effect next year, bringing cumulative savings for 2014-16 to €28bn.

But that is €6bn short of the original three-year plan set by Italy's former spending tsar in a March 2014 report, made public only 10 days ago. Carlo Cottarelli, a former director of the International Monetary Fund, resigned in October because of differences with Mr Renzi's government over his spending restraint strategy.

Rome is under constant pressure from the EU and the IMF to rein in its high levels of public debt, even if Italian bond yields are trading close to historical lows.

Italy now expects its economy to grow by 0.7 per cent this year and 1.4 per cent in 2016 after three years of recession.

Mr Renzi's advisers insist he remains "fully committed" to making ambitious cuts.

"Italy has been reducing its spending like no other European country that has not received European aid," said Yoram Gutgeld, an economic adviser to Mr Renzi and one of two new spending review commissioners.

Mr Gutgeld told the Financial Times that spending cuts would be focused on consolidating public procurement, reforming the public administration, more efficient infrastructure investment, slashing corporate subsidies and limiting unjustified welfare expenditure. The government is also working on a plan to reduce the public sector's energy bill.

Some analysts doubt whether the efficiency savings will ever materialise, given the less ambitious overall target and the lack of detailed public plans for implementation.

"Given public sector inertia and Renzi's inclination towards expansive fiscal policies, the ability to deliver meaningful change remains to be seen," said Wolfango Piccoli, a political analyst from Teneo Intelligence.

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Italy has long struggled to cut public spending, which stood at 50.5 per cent of gross domestic product in 2013 - just over the eurozone average of 49.5 per cent. The challenge was given added urgency with the eruption of the eurozone debt crisis and concerns that Italy could struggle to repay its debts.

Mr Renzi is facing powerful opposition to spending cuts from members of his own Democratic party in parliament and from local politicians worried that they would bear the brunt.

"When you touch money, you start having political problems," said Riccardo Puglisi, a professor at the University of Pavia and economic adviser to the centre-right party Italia Unica.

"Some things have been done, but the government is over-reliant on external factors, such as low oil prices and the effects of the ECB's quantitative easing, and thinks that it can get away with cutting less."

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