The new government took its first step towards straightening Italy's public accounts on Thursday, forcing several regions to put up taxes to cover a budget hole created by excessive health spending.
The decision, taken during the centre-left government's first full-fledged cabinet meeting, affects six Italian regions out of 20.
The regions - Liguria in the north, Lazio, Abruzzo and Molise in the centre and Campania and Sicily in the south - were told to raise income taxes and a regional business tax called IRAP because they had breached their health care budget limits.
Economy Minister Tommaso Padoa-Schioppa stressed at a press conference after the cabinet meeting that the tax hikes were automatic under the terms of the 2006 budget approved by the previous government.
He also said a tighter control would be kept on public spending, with constant monitoring by the chief state accountant's office. The minister said that all spending caps contained in the 2006 budget would be "rigorously applied", including public administration hiring limits and reductions in ministry consultancy, advertising and chauffeur spending.
Amelia Torres, spokeswoman for European Economic and Monetary Affairs Commissioner Joaquin Almunia, commented from Brussels that the government's move was a "very positive step in the right direction". But she also stressed that additional corrective measures such as a mini-budget might be necessary. Curbing Italy's rising deficit and public debt are the two most urgent tasks facing Premier Romano Prodi, who won the narrowest of victories against his predecessor Silvio Berlusconi in the April general election.
The premier is reported to be considering a 7-billion-euro mini-budget.
Italy's budget deficit has breached the 3% limit for the past three years, rising to 4.1% in 2005 - the highest level since 1996. It is seen as hitting some 5% of GDP this year unless budget adjustments are made. The previous government predicted a deficit of 3.8% this year and promised the European Commission that it would be slashed to 2.8% by the end of 2007.
Brussels has ruled out an extension on that deadline despite the worse-than-expected accounts situation.
Bank of Italy Governor Mario Draghi said on Wednesday that in order to meet its EU commitment, the government needed to introduce corrective measures totalling 2% of GDP or some 28 billion euros by the end of 2007. Meanwhile, Italy's debt mountain - the third biggest in the world - began rising last year for the first time in a decade and is forecast by the European Commission to hit 107.4% of GDP this year.
International credit rating agencies have warned they may downgrade the country's credit ratings unless concrete action is taken on the deficit and debt fronts. The opposition rejected centre-left accusations that it let public finances spiral out of control while it was in power. Instead, it accused the government of preparing a tax sting.
Former reform minister Roberto Calderoli said that "instead of cutting spending and eliminating waste, the only thing they do is put up taxes". "They raised them on a regional level today but tomorrow, it will be on a national level," he said.
