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Italian consumer confidence in May unexpectedly rose to its highest this year as Prime Minister Silvio Berlusconi formed a new government that announced tax cuts and relief for homeowners facing higher mortgage payments.

The Rome-based Isae Institute's index, calculated from a survey of 2,000 families, rose to 103.2 from a revised 99.9 last month. Economists had expected a decline to 99.4, according to the median forecast of 16 predictions. The increase was the second gain since the index fell to a four-year low in March.

“The change of guard and the fiscal pledges will provide a short-term boost, even though the scenario in the long run remains bleak,'' said Marco Valli, an economist at UniCredit Group in Milan.

Berlusconi's first legislative act yesterday was to scrap the country's main residential property tax and reduce levies that workers are charged on overtime pay. The government also announced an agreement with banks to allow homeowners to freeze mortgage payments at 2006 rates, a measure that could affect 1.25 million families. More than 70 percent of Italians back the measures, a survey by polling company IPR Marketing showed today.

Consumer optimism about their short-term prospects surged to 101.7 from 95.6, while confidence about the economic situation rose to 84.9 from 79.6, Isae said today in its report.

Berlusconi won the April elections with a bigger-than- expected majority in parliament.

Tax Pledges

“The end of the political uncertainty with the victory of the center right and the promises to adopt measures to help wage earnings, could have had a positive effect,'' Chiara Corsa, an economist at UniCredit Group, said in an interview with Bloomberg television.

Still, “today's positive number doesn't change expectations that there won't be any dynamic change in consumption,'' she said.

The government is trying to combat the effects of higher food costs and oil prices above $135 a barrel, which are stifling consumer spending. Household consumption accounts for two-thirds of the $2 trillion economy and the drop in spending is leaving Italy on track to be the 15-member euro region's worst- performing economy this year.

No `Easy Fixes'

So far, Italians are pleased with the direction of economic policy-making. Eighty-seven percent of Italians support the removal of ICI, a tax property tax homeowners pay to local authorities, IPR said. The pollster surveyed 1,000 Italians yesterday, after Berlusconi held his first policy making cabinet meeting and confirmed the abolition of the tax. No margin of error was given.

Still, finance minister Giulio Tremonti said this week Europe's fourth-biggest economy will stall this year and that there are no “easy fixes.'' Families have been on tight budgets and Italian retail sales have been tumbling for the past 14 months, a monthly Bloomberg survey showed.

The government's outlook is even gloomier than the European Commission's forecast of 0.5 percent growth, which would probably make Italy the slowest-growing economy in the euro region in 2008. The Italian economy may have already slipped into recession in the first quarter, some economists say, and has suffered three recessions between 2001 and 2005.

The national statistics office, Istat, tomorrow releases growth figures for the fourth quarter and first quarter of 2008 at 11 a.m. Rome time. The April consumer confidence number was revised from 99.8.

The Isae survey was conducted between May 2 and May 19.

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