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Italy's crucial tax deal will come at a cost

Thursday, 29 Aug 2013 | 4:40 AM ET
Elias Kordelakos photography | Flickr | Getty Images

The pressure on Italy's fragile Italian coalition government may have eased after ministers voted to abolish an unpopular real estate tax, but some analysts warned that this political stability would come at a cost.

The two political parties within Prime Minister Enrico Letta's government on Wednesday greed to scrap the housing tax (IMU) and to replace it with a new levy, which will be implemented in January 2014. The vote is a boon for Silvio Berlusconi's People of Liberty (PdL) party which had said it would rebel against Letta's leadership if the tax was not abolished.

But one analyst told CNBC that the decision had only pushed Italy's problems – and political infighting - further down the road.

(Read more: Is Italy on a Collision Course With Europe?)

"[While] removing the likelihood of a government collapse, this will only defer the problem simply because it still leaves a budget shortfall and will increase the pressure on the government to implement long term structural reforms," Michael Hewson, senior market analyst at CMC Markets, told CNBC on Thursday.

"Given previous government track records, that is likely to be a lot harder and will probably bring the government into conflict with the EU as well as between each other."

The changes to the IMU tax – which has been scrapped on principal residences, but will still apply to second homes and commercial property - will cost Italy around 4 billion euros, according to Wolfango Piccoli, managing director of Teneo Intelligence. This revenue hole will be plugged by spending cuts, Economy Minister Fabrizio Saccomanni said, although these have yet to be finalized.

(Read more: Italy Could Be Riskiest of EU Coalition Governments: JPMorgan)

After the vote, Deputy Prime Minister (and PdL member) Angelino Alfano tweeted "Mission accomplished!" and Berlusconi said the tax burden for Italians had been reduced, according to Italian news agency ANSA.

(Read more: Italy's central bank sees even steeper decline for economy)

The deal was a victory for Berlusconi, according to Nicholas Spiro, head of Spiro Sovereign Strategy, but he stressed it would come at a cost.

"The price for preventing Italy's conflict-ridden coalition government from collapsing is more uncertainty regarding fiscal consolidation and, more worryingly, no progress on structural economic reforms," he told CNBC.

(Read More: Italy's Berlusconi Gets 7 Years for Sex With Minor)

Giada Giani, European economist at Citigroup, added that while the deal was good for government unity, it was "not positive for the economy or on a fiscal level."

"It's uncertain and still not sorted out where other spending cuts are going to happen. This might be a positive for the political parties in that they've come to some kind of compromise over the tax but not so much for fiscal dynamics," she told CNBC.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

Follow us on Twitter: @CNBCWorld

Contact Europe: Economy

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