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Italian leaders may redo major austerity cuts

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Jeremy Hobson: The Italian government has decided to overhaul its $66 billion package of budget cuts passed earlier this month. Rome is making its austerity budget, it seems, a bit less austere. The government plans to drop several tax measures and allow its budget deficit to remain at a higher level.

Marketplace’s Stephen Beard joins us now live from the European desk in London with the details. Stephen, first of all, what exactly is the Italian government up to here?

Stephen Beard: Well, it is, as you say, rolling back some of its austerity measures which were designed to cut the deficit to reassure investors. So the government’s scrapped a plan to slap heavier taxes on higher earners, and it’s scrapped some spending cuts. So, not entirely reassuring for investors who are deciding whether or not to buy Italian government bonds.

Hobson: Well, if the whole point of the package in the first place was to reduce the debt and to make the bonds more attractive to foreign investors, then why would they be backtracking?

Beard: Well, there’s some confusion here. I mean, the government says that actually its new measures will still reduce the budget deficit by the same amount as before — it’ll just do it in a different way. We’ll have to wait and see the details to see how true that is. But it does appear the government was worried about politics — that it wouldn’t get the old austerity package through parliament because it was so unpopular.

Hobson: And what are the risks, Stephen, associated with this sudden change-up?

Beard: Well, investors have to be reassured. And today, as it happens, the Italian government’s trying to borrow $11 billion on the bond market. This is going to be a critical test of investor confidence, this is the first time they’re doing this since the European Central Bank stepped in a couple of weeks ago to buy up Italian and Spanish government bonds. So today we’ll see whether investors are prepared to lend more money to the Italian government, bearing in mind some concern that the Italians may be going soft on austerity.

Hobson: Marketplace’s Stephen Beard in London. Thank you, Stephen.

Beard: OK, Jeremy.

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