There are two major issues facing the Prodi government at the moment: the budget for 2006/7, and the government's relations with Telecom Italia.
The budget decree was agreed in the Council of Ministers on Sunday and signed that same day by the President of the Republic. It contains cuts ('savings') and tax-increases amounting to €33 billion, which according to the Treasury will reduce the budget deficit to 2.8% of GNP compared to 4.8 for the year 2006. The final figure represents a victory for Romano Prodi and finance minister Tommaso Padoa-Schioppa against the left-wing of the governing coalition, who had requested a change of closer to €26bn with fewer cuts. The manouevre was made possible by an unexpectedly good tax take earlier in the year (good fortune also shared by France and Germany), and by a judicious selection of cuts and tax increases. The government has been able to keep its promise to reduce employer and employee taxes, but employers' associations are upset about changes to the severance pay fund, from which the government will take €5bn more over the next year.
Attention now shifts to the Parliament. The Prodi government has only a wafer-thin majority in the Senate. It is likely that the government will have to make the Finance law a vote of confidence. One senator, Sergio de Gregorio, elected as part of the left-wing coalition only to defect shortly after, has threatened not to vote for the government, which would leave the government with a majority of one, perilously close to relying one the life senators, whose support would probably be enough to pass the budget - but also enough to show the government incapable of a majority in one of the chambers, thereby constraining it to resign. The government will have to whip carefully in order to ensure not only that it retains its majority, but that members of the leftist parties do not introduce amendments which will grossly distort the bill.
The decision on the finance bill will be a welcome relief for Prime Minister Romano Prodi, who has had a torrid week explaining his government's policy towards Telecom Italia. Prodi's consigliere Angelo Rovati, the author of a botched plan to rescue Telecom Italia's mobile arm from foreign ownership, has taken the fall for what was seen by many in Europe's financial press as excessive government interferene in a private company. Nevertheless, Prodi must ensure that he is a more collegial Prime Minister than he was President of the European Commission, where he produced a secret draft for a constitutional treaty unseen by fellow Commissioners".
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