Italy's Renzi says he has found funding for tax cuts

By Stefano Bernabei

ROME (Reuters) - Italian Prime Minister Matteo Renzi said on Tuesday he had found ways to fund a pledged 7 billion euro tax cut this year, moving to reassure sceptics and European officials that Italy does not plan to upend its public finances to fuel economic growth. Speaking to reporters before a cabinet meeting to lay out his new government's economic goals, Renzi shrugged off scepticism from opponents that a set of tax cuts were an electioneering gambit ahead of next month's European elections. "The tax cuts are funded from the very first day. You people don't believe it but we have been ready for three weeks," said Renzi, who took office in February after ousting predecessor Enrico Letta in a party coup. Renzi will hold a news conference at around 1930 (1730 GMT) after a cabinet meeting called to sign off on the Economic and Financial Document (DEF) which sets the framework for budget plans over the next three years. The DEF is expected to cut the previous government's growth forecast for this year, but make little change to targets for the fiscal deficit. The draft document must be presented to the European Commission for its approval.

"We only hope Renzi doesn't cook the books because the judges aren't only in Italy but also in Europe," said Renato Brunetta, lower house leader of Silvio Berlusconi's center-right opposition party Forza Italia. Most of the revisions to economic and public finance targets have been leaked in recent days, so attention at the news conference is likely to focus on any information Renzi offers on how he will fund his tax cuts. He has promised to reduce income tax on low earners by 80 euros per month from May, costing the state some 7 billion euros this year and 10 billion thereafter, and to finance the cuts mainly by reducing public spending. COMMUNICATOR However Renzi, a consummate television performer who is already campaigning for European Parliament elections in May, may give little detail and instead use the news conference to focus on popular moves with little impact on public accounts. These are likely to include plans to capping the pay of top public sector managers and scrapping some particularly superfluous public bodies. The 39-year-old former mayor of Florence is enjoying a honeymoon period with Italian voters who have warmed to his dynamism and quick-fire, informal communication style. He promised reporters on Tuesday the cabinet meeting and news conference would "all be over in time for the evening news." His center-left Democratic Party (PD) commands more than 30 percent of the vote in opinion polls, giving it a comfortable lead over the anti-establishment 5-Star Movement and Forza Italia, which both have less than 25 percent. But Renzi must still tread carefully. He has many enemies in his own PD party and among trade unions, and his popularity could easily evaporate if and when he takes tough decisions that threaten public sector jobs and vested interests. In the face of an icy reception from the European Commission Renzi appears to have already backtracked from an original plan to fund the tax cuts partly by increasing government borrowing. The target for the budget deficit this year is likely to be raised only marginally to 2.6 percent of output, from 2.5 percent, government sources have said, meaning the bulk of the tax cuts will need to be funded by lower spending. Renzi can count on some savings from lower debt servicing costs thanks to the recent fall in yields on Italian government bonds. But most economists believe his new, lower forecast for economic growth this year is still too optimistic. The International Monetary Fund on Tuesday forecast Italy will grow by just 0.6 percent this year after two years of contraction, while the DEF is expected to cut the government's official projection to 0.8 percent from 1.1 percent.

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