Italy urged by OECD to maintain Berlusconi’s pension reform in order to stabilize public finances

ROME (Reuters) – Italy’s government should halt its plans to scrap the pension reform introduced by the previous center-right government because it is vital to consolidate public finances, the Organization for Economic Cooperation and Development (OECD) said yesterday. Prime Minister Romano Prodi is struggling to get rid of the unpopular reform which ups the minimum retirement age to 60 from 57 as of next year. But he is aware the pension system can ill afford to lose the savings that the reform would allow, and the government is in difficult talks on the issue with trade unions. However, in a survey on Italy, the OECD said the existing legislation, passed by Prodi’s predecessor Silvio Berlusconi, should not be repealed. «(The) reforms are essential to achieve budget control in the medium term and fiscal sustainability in the long term,» it said. Economy Minister Tomasso Padoa-Schioppa, speaking at a news conference presenting the report, said any changes to the pension reform legislation must not compromise the savings that the reform was supposed to create. However, his stance is contested by trade unions and leftists in Prodi’s broad coalition, who are pushing for higher spending and see no urgency in raising the retirement age. OECD Secretary-General Angel Gurria told Reuters in an interview that «the risk of inaction» was the main obstacle to the OECD’s upbeat scenario for Italy of firm economic growth and a falling budget deficit. «The cost of not acting is not always obvious… but it means lost opportunities in terms of sustainable growth,» he said. Only by cutting spending could Italy afford vital investment in research and development and higher education, Gurria said, calling also for reforms to increase the participation of older people and women in the labor market. Buoyant revenues On pensions, he called on the government not to give in to vested interests. «It needs a very strong effort of translating, communicating, educating and making not just the stakeholders but also the general public aware of the consequences, not just of action but also of inaction.» The Berlusconi reform should be seen as an opportunity not to be thrown away because Italy «has already agreed what others are still trying for – a prolongation of the retirement age.» On public accounts, the OECD said, «Even though buoyant revenues brought down the public deficit last year, Italy should maintain a prudent fiscal policy in 2007 and beyond in view of the high public debt that is still above 100 percent of GDP.» One year into his mandate, Prodi and Padoa-Schioppa claim to have the deficit under control – forecasting it at 2.3 percent of GDP this year and falling – and are still enjoying better-than-expected tax receipts. But that has meant they are being torn between claims from the left for greater spending and from centrists for tax cuts, something the OECD said they should resist. «The authorities should seek to build on last year’s fine outcome and make further consolidation in 2007 so as to preserve hard-won gains and take further steps toward achieving fiscal stability,» it said. «This will not be easy as there is already political pressure for a boost to spending or early tax reductions… such policy changes would be premature and would make the medium-term budget prospects more difficult.» The OECD welcomed liberalization policies already made in areas such as retail and banking and called for more of the same as well as privatizations in transport, utilities and the media. It also called for more rigorous steps to curb spending. «The government should consider introducing medium-term expenditure caps to constrain the growth of primary spending, for example, a zero real increase in central government primary spending until the primary surplus reaches 5 percent of GDP.»

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