Berlusconi on the Boil

Silvio Berlusconi was elected as Italy's prime minister after campaigning on a platform of reinvigorating the economy through tax cuts and liberalization. After three years in office, he has not delivered on his economic agenda and his government is in shambles. What went wrong?

Italy's economic ills are well known. At the risk of over-simplifying, they can be grouped under three headings:

ยท Weak public finances . When Italy joined the European Monetary Union, its primary budget surplus (tax receipts in excess of government spending, excluding interest payments) was about 5% of national income. In 2004, the surplus will shrink to about 1.5% - before the tax cuts that Berlusconi promised for next year. Excessive social welfare spending (mainly public pensions) and the cost of servicing the public debt drain resources from more productive government spending and impose a high tax burden. The government has failed to take any meaningful action, and the problem is getting worse. Unsurprisingly, the rating agency Standard & Poor's recently downgraded Italian public debt.

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