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Italian government cuts low earners' income tax to ease pain of austerity measures

Associated Press
Published | Updated

ROME – Italian Premier Mario Monti's government has announced a cut in income taxes for low wage earners, an unexpected move aimed at easing the pain of austerity measures being enforced to reduce public debt.

The government said the tax cut is part of a draft budget that will allow it to balance the budget in 2013 but also give some relief to low income families and support economic activity and employment.

"This budget shows budgetary discipline - vigorously pursued by this government since its first day in office - does pay off," Monti said early Wednesday after a Cabinet meeting that ended after midnight.

Among the measures were a cut in the personal income tax rate to 22 percent from 23 percent for revenues up to €15,000 a year and to 26 percent from 27 percent for revenues between €15,000 and €28,000.

The value added tax will increased July 1 by one-percentage point to 22 percent instead of the earlier planned two points.

The government also announced an additional €3.5 billion in spending cuts and a new tax on financial transactions it said was being introduced in 10 other eurozone countries, including Germany and France.

Italy's need to regain market confidence in its public finances was highlighted in a pair of short-term bond auctions Wednesday in which the government raised €11 billion ($14.1 billion) at slightly higher interest rates.

Particularly noteworthy was the increase in the interest rate on one-year bonds to 1.91 percent from 1.69 percent in the previous auction of such debt. While the rate is still manageable and demand was strong, the increase shows investors are somewhat more wary of taking on Italy's debt.

In recent weeks, the focus in Europe's debt crisis has shifted away from Italy to Spain and Greece. The yield on Italy's benchmark 10-year bonds remains below an affordable rate of 5 percent as investors have given their backing to the economic strategy of the Monti government and a new European plan to give financial aid to countries in need.