Italy Imposes Austerity to Trim Deficit : Budget: Rome fears its economy will not keep pace with European neighbors. The new measures could cost the average family $400 a year.

ROME —  In danger of losing coveted front-rank status in the European Community, the Italian government Wednesday imposed an austerity budget designed to narrow an alarming government deficit.

The controversial budget, written by a ruling four-party coalition, will mean “difficult years but essential ones,” Prime Minister Giulio Andreotti told Italians in a nationwide television address.

“Soon, the European Community will examine our accounts. Europe can do without us, but it is we who cannot do without Europe,” Andreotti said in the Tuesday night address. “Italy is not autarkic. We are among the world’s most industrialized countries, but there is a limit to how indebted we can become.”

The 1992 goal is to reduce the state budget deficit by around $45 billion. That is to be accomplished by a combination of cuts in public spending, including higher prices for government health services, higher property taxes for businesses, privatization of some state industries and a cap on public wages.

The most immediate, visible impact for Italians will be steep increases in the price of prescription drugs, now largely subsidized by the state. There also will be a revaluation of property and a demand that businesses pay a year’s property taxes in advance.

By one estimate, the new measures will cost each family around $400 over the next year.

Under new laws, second homes will be taxed more highly and public sector pay increases will be held to 4.5%.

A proposal to raise the retirement age, thereby easing pressure on a bankrupt national pension system, was scrapped after objections from the Socialist Party, the second most powerful force in a government headed by Andreotti’s Christian Democrats.

Italy’s pharmacists joined Health Minister Francesco De Lorenzo in protesting the higher prices for medicine. Labor unions, threatening a general strike, joined discomfited industrialists in criticizing the new budget, intended to reduce the government’s deficit from 12% to 9% of gross domestic product.

“Financial laws can only be successful if they leave everyone equally dissatisfied. This one does that,” said Fiat chairman Gianni Agnelli with irony.

The new measures, eight months before scheduled national elections, stopped far short of needed structural reforms, in the judgment of some economic observers. “An aspirin,” said Cesara Rimiti, Fiat’s managing director.

Interest payments on a national debt of about $800 billion--nearly all of it owed to Italians--underlies a stubborn deficit that has troubled a long procession of coalition governments too weak to enact sweeping reforms.

Italians sometimes brag that they have overtaken Britain to become the fifth-largest industrial democracy--after the United States, Japan, Germany and France. Last week, though, the Organization for Economic Cooperation and Development (OECD) noted in its annual survey of Italy that the country is falling behind its European partners.

The OECD report warned that the strain of the deficit and debt, combined with inflation and unemployment, is more than offsetting economic growth of 2% to 3%.

Inflation, which may reach 7%, is double that of France and Germany. Unemployment of 11% is twice that of the other major OECD countries. Last year, Italy’s public debt surpassed the gross domestic product for the first time since World War II.

Amid clear and disturbing signs that the Italian economy is moving toward recession, the new austerity measures were overdue, in the government view. “We have to get used to making our books balance,” Andreotti told his compatriots.