At the same time as the new German government was considering raising taxes, in Italy Silvio Berlusconi came up with a financial package that his economy minister, Giulio Tremonti, hailed as the biggest reduction ever of personal income tax.

The Berlusconi government has aimed the tax exemptions and reductions at those with an income of below 33,000 a year. Those with an annual income of less than 7,500 will not pay tax at all. Those with between 7,500 and 33,000 will pay less tax the closer they are to the lower end of the scale and more the closer they are to the upper end. Those with incomes above 33,000 a year will pay much the same tax as before. Companies annual profits will also be taxed less, down from 36 per cent to 34 per cent.

The tax decreases were meant to be accompanied by incentives on a list of consumer durables such as kitchen appliances, but these were cut back until only credits on satellite decoders and broad band equipment remained. That these should have survived just as Rupert Murdochs News Corporation was buying Telepi, Italys largest satellite company soon to be renamed Italia Sky, was said to be just a coincidence.

In a classic, but watered-down, Keynesian manoeuvre, Tremonti is trying to pump money into the economy in order to stimulate its growth next year. He estimates that the gross domestic product (gdp) should increase by 2.3 per cent in 2003 compared with an increase of 0.6 per cent this year. However, only two months ago he was being even more optimistic, putting next years growth rate at 2.9 per cent, and this years at 1.3 per cent.

At the end of September the economy minister had to admit that growth had been slower than expected and that as a result taxes had brought in less than he had calculated, leaving a larger budget deficit than he had anticipated. Last year he was predicting that the budget deficit would be 1.1 per cent of gdp; a few months ago he predicted it would reach 2 per cent; now it has crept up to 2.1 per cent. In the shadow of this bad news, the Berlusconi government has been forced to face up to the difficult subject of sacrifices, a word the prime minister does not like using.

Berlusconi was quick to clarify that he meant that the regional governments, not ordinary citizens, would have to make the sacrifices. It was not possible, he pointed out, that the regions should be allowed to raise their taxes just as his government was decreasing them. Regional belt tightening is not good news for the federalist-minded partners in the government coalition, such as the Lega Nord, who are still pressing for faster rather than slower financial autonomy for Italys regions.

However, the real sacrifices are to come from elsewhere. All ministries will have to cut next years spending by ten per cent and there will be no more hiring for state jobs for at least a year. The two sectors to be most seriously hit will be health and education. In the health services the cuts range from making patients pay for their thermal cures (the cost of which is now heavily subsidised by the health service as a form of indirect handout to the tourist industry in Italys famous health spas) to the reduction of hospital beds. Both these measures will be unpopular with the regions, which administer the health service and tourism. In schools the measures go from hiving off the cleaning services to private contractors (which will spell the end of that characteristic figure of every Italian school, the bidello) to not converting the contracts of technical staff into teaching contracts.

The Berlusconi government also has plans to sell off parts of the national heritage in order to raise revenue. Details still have to be worked out but the project looks suspiciously like an accounting manoeuvre. Under the scheme, parts of the national heritage will be sold, or more probably leased along the lines of the British leasehold system, to a company called Patrimonio Spa. The state will retain the freehold but will sell off a long lease on the property. It is already being suggested that the state will eventually turn out to be both freeholder and leaseholder, first selling off bits of the national heritage to Patrimonio Spa and then leasing them back at a later date.

In addition, the government will be raising money with yet another condono, a well-tried source of revenue in moments of financial crisis. A condono allows people to legalise their illegal activities (whether it be employing immigrant workers without the necessary documents or adding rooms to houses without planning permission) on payment of a comparatively small fine. This latest condono will allow organisations to regularise their tax positions. Any company that thinks it may have fallen foul of the tax system in the last three years, or thinks it may transgress it during the next three, will be able to pay a fee to exempt it from future fines and litigation. Most companies pay up on the assumption that they probably have committed, or will commit, some misdemeanour (it is almost impossible not to in the complicated world of Italian taxes). They also do so because they fear that otherwise they will be targeted for a tax inspection. However, it is interesting to remember that when the first Berlusconi government used a condono to raise much-needed revenue in the early 1990s considerably less money was collected than was hoped.

This mix of stimulus and severity aims to balance Italys budget by 2006, three years later than was initially envisaged by the European Union directives. But how likely is this Tremonti budget to achieve its aim? Success or otherwise depends in part on the unions, which are already threatening more strikes. But it will also depend on inflation, a subject the government prefers to ignore, but which everyone else knows is now beginning to bite. Whether it is rent, transport, the weekly trip to the supermarket or the daily shop at the local grocers, prices are going up. What will make it very difficult for Tremonti to get his calculations right is that the people who will benefit from his tax reductions are those who are having the greatest difficulty in fighting off the effects of inflation. They are not the countrys big spenders, with money to spread around. The extra they get will not be spent on luxury goods, probably not even on consumer durables. It will go to paying for the necessities of life such as school books, the gas bill or that proverbial loaf of bread. The minister is being optimistic if he thinks that there will be as much left over to stimulate the economy as he would like and perhaps he will have to revise his figures all over again.