Even amid eurozone crisis, Italians chafe at deeper cuts

Italy is under pressure from the European Central Bank to adopt austerity measures, but Italians suffering financially resent the government's austerity plan and tax increases.

Fabrizio Bianchini, who works as a delivery man for a soap company, faced a tough task on Sept. 6, the day Italy's powerful CGIL union declared a nationwide strike against proposed austerity measures. Public transportation was suspended in major cities and the streets were clogged, complicating his efforts to get his deliveries to their proper destination.

But despite the disruption to his workday, Mr. Bianchini sympathizes with the protesters. His only regret is that he could not take part in the strike.

"I feel insulted and I am really worried about the future," says Bianchini after a long day. "Whoever thought up this economic reform did not realize that average families are already struggling. They probably thought 1 percent extra taxes on food and other goods won't hurt anyone, but that's not true.

"Personally, I am already spending all I earn to support my family," he continues. "How can I find some extra €30 or €50 each month?" (That's the equivalent of $40 to $70.)

The demonstrations that have rocked Italy come amid the conservative government's move to pass a controversial emergency austerity plan to avoid default and reduce the deficit by €54 billion ($70 billion) over three years.

The plan – mostly raising taxes and, to a lesser degree, cutting spending – has been criticized both by the left-wing opposition, which sees it as a way to further hurt the working and middle classes, and by free-market economists, who fear higher taxes will stifle economic growth.

The European Central Bank, which has spent billions to buy Italian bonds to help Italy avoid default, has pressured the country sharply to adopt austerity measures to calm markets. But the steps are not sitting well with many Italian families who, according to a recent study by Stephen Jenkins of the London School of Economics and Andrea Bardolini of Italy's Central Bank, lost 3.3 percent of their disposable income between 2007 and 2009. (In Greece, which has the second-worst rate, families lost 1.3 percent during the same period.)

The widespread resentment against the government is bolstered by the fact that, until recently, Prime Minister Silvio Berlusconi touted his opposition to high taxation.

During his second term in 2004, he even declared at a press conference that he felt "morally authorized to evade taxes," as they were too high. At the time, the average citizen faced a 42 percent tax rate, one of the highest among developed nations.

But seven years later, during his third term, Mr. Berlusconi is raising taxes to 44.5 percent.

That troubles Bruno Paolillo, a schoolteacher in Rome who took part in the Sept. 6 protest.

"I don't really understand how they can think to boost the economy by raising taxes," he says. "All I foresee is poor people becoming even poorer, and those who already evade taxes keeping doing so. Moreover, you don't need to be an expert to understand this will hurt consumption."

The government counters that it has no choice. With a public debt close to 120 percent of its annual gross domestic product (its total output of goods and services), Italy has been put under pressure both by markets – Standard & Poor's downgraded Italy's credit rating outlook last May – and by the European Central Bank, which agreed to buy Italian bonds, but only on the condition that Italy urgently adopt reforms to balance its budget.

"The question is how to achieve this balance," says Tito Boeri, a professor of economics at Bocconi business school in Milan. "The government could either cut spending or raise taxes, and it chose the latter."

Berlusconi's plan consists of four major points: raising the value-added tax (essentially a sales tax) from 20 percent to 21 percent; hiking income taxes by 3 percent for the wealthy, defined as those who earn more than €300,000 (about $417,000); raising the minimum retirement age for women from 60 to 65; and cutting funding for ministries and other governmental institutions.

But Mr. Boeri says that higher taxes account for more than 70 percent of the budget plan, while lower spending accounts for less than 20 percent. Boeri believes the government should have taken a "more courageous stance" in cutting social security and other forms of welfare rather than raising fiscal pressure.

"They are literally strangling the middle class," he argues.

In the past, the Italian electorate has been more concerned with services than taxation: "I suspect Berlusconi decided to increase tax revenues [rather than cut spending] because he feared upsetting voters," he says.

Yet, as the protests demonstrate, the prime minister still could not dodge social unrest.

For his part, Bianchini puts the blame on out-of-touch politicians. "They don't even know what a grocery store looks like," he grumbles.