Italian Prime Minister Renzi looks up as he waits for the arrival of Palestinian President Abbas at Chigi Palace in Rome

Renzi’s forced pension payout makes Italy’s budget task harder

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By James Mackenzie

ROME (Reuters) – Italy will pay out an extra 2 billion euros ($2.29 billion) to pensioners in August to respect a ruling from the constitutional court which overturned part of a landmark 2012 reform, Prime Minister Matteo Renzi said on Sunday.

Last month’s ruling by the court has posed a major headache for Renzi’s government, which has struggled to keep public finances within the limits of European Union budget rules.

The court overturned provisions in a reform passed at the height of the eurozone debt crisis by the technocrat government of former Prime Minister Mario Monti, which blocked inflation-adjusted increases in pensions of more than 1,500 euros a month.

Renzi told Rai state television that he was unhappy about the ruling, which threw government budget plans up in the air just two weeks before the European Commission was due to give a formal opinion on Italy’s 2015 financial program.

The ruling did not say precisely what action the government must take, and Renzi said it would not make a full adjustment immediately, which he said would total 18 billion euros.

“That would mean taking 18 billion euros and cutting schools, social welfare, roads. That would be crazy,” he told Rai’s Sunday program Arena.

However he said it would use around 2 billion euros, which had originally been earmarked for measures alleviating poverty.

“On August 1, four million Italians will have more or less 500 euros each in their pockets,” he said. Pensions of more than 3,000 euros a month would be excluded, and more details would be announced after a cabinet meeting on Monday.

The court ruling, which said all pensioners had to receive equal treatment under the law, has been criticized for narrowly focusing on one aspect of constitutional law and ignoring the wider realities facing Italy, which has one of the heaviest public debt burdens in the world at over 130 percent of GDP.

The original reform, passed as Monti’s administration was fighting to keep Italy from bankruptcy, yielded savings of around 5 billion euros, or around 0.3 percent of gross domestic product in 2012-13.

A study last week by small business association CGIA estimated that to reverse the indexation freeze and restore inflation-adjusted increases in subsequent years to 2015 on all pensions affected by the ruling would cost 16.6 billion euros.

Italy has promised the European Union it will lower its budget deficit to 2.6 percent of GDP this year from last year’s 3.0 percent, the EU’s ceiling. The latest developments will make this target more difficult.

The Commission said last week that it would assume for the moment that the constitutional court ruling would not affect Italy’s budget projections but that a final decision would depend on what action the government took.

($1 = 0.8733 euros)

(Reporting by James Mackenzie; Editing by Mark Trevelyan)


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