Italy's Monti announces income tax cut, lifts VAT

Prime Minister Mario Monti announced an income tax cut to help low earners today, giving a rare lift to struggling Italian households ahead of parliamentary elections next year but leaving unions dissatisfied and threatening a strike.

The unexpected measure was presented in the early hours of the morning, along with a rise in value added tax and a raft of spending cuts designed to keep Italy on course to meet budget goals agreed with the European Union.

Monti said the multi-billion-euro tax break, coming into effect at most four months ahead of elections, showed that painful austerity measures implemented by his unelected administration were beginning to produce results.

"Today we can see that budget discipline pays and makes sense," he told reporters after a marathon cabinet meeting.

Economists gave the tax cut a guarded welcome, but said it would do little to address the underlying problem of persistently low growth that has dogged the debt-riddled Italian economy for more than a decade.

Italy's biggest union, the CGIL, said the cuts to spending and local services amounted to a new austerity package and the government had to do more to help workers.

"If there are no answers on incomes and jobs, there'll be a general strike," CGIL leader Susanna Camusso said on Twitter.

Tito Boeri, professor of economics at Milan's Bocconi University, said the stimulus package could have gone further.

"It's still a very timid measure because the provision is still very limited as far as reducing fiscal pressure on wage earners is concerned. They could have done much more," he said.

The one-percentage-point cut in the two lowest income tax brackets is expected to cost 5 billion euros (4 billion pounds), according to a Treasury source.

The rate will drop to 22 percent from 23 percent for those earning less than 15,000 euros per year, and to 26 percent from 27 percent for salaries between 15,001 and 28,000 euros.

The cuts come into force at the start of next year, just months ahead of elections due to be held by April. The top three income tax bands will remain unchanged.

The government fell short of expectations that it would eliminate a planned two-percentage-point hike in value added tax, due to come into effect in June next year. But it did limit the increase to one point.

Giacomo Vaciago, an economist at the Milan's Catholic University said the tax cut was a "golden pill aimed at creating a bit of hope," but did nothing to address the growth problem.

"In structural terms, for recovery, there's little or nothing. There's no serious, structural discussion of recovery," he said.