OECD gloomy on Italy's finances

Continuing political and economic uncertainty took the lira lower against other European currencies yesterday. It closed at 1,054 against the mark despite Italy's new government winning a confidence vote.

A report published by the Organisation for Economic Co-operation and Development said the government's finances were ``unsustainable''.

The annual health report on the Italian economy from the industrial countries' think tank said that despite a strong recovery and heroic cuts in government spending programmes, the budget deficit increased last year. It rose to 154,000 billion lire, after falling in 1993. A surplus of revenues over spending was swamped by debt interest payments of 175,000 billion lire.

A planned reduction in the government deficit to 139,000 billion lire this year is unlikely to succeed. Although the budget proposals include cuts in pensions, reduced health expenditure and a public sector hiring freeze, the country's past record of missing targets leads the OECD to conclude that this target will not be met.

With a deficit twice as big as the OECD average, and an inexorably rising ratio of government debt to national output, Italy's governments have come under pressure from the financial markets to sort out their chaotic finances.

Although full of praise for attempts to improve the government finances, the OECD's economists say that further reform will be difficult. The biggest problems are achieving more cuts in the country's generous provision of state pensions, and ballooning interest payments on government debt of nearly 2 million billion lire.

Even so, Italy retains some attractions for international investors. The economy is likely to grow by nearly 3 per cent both this year and next, while inflation should fall from 4 per cent in 1994 to 3.3 per cent this year.