Italy austerity plan faces Senate confidence vote
* Senate confidence vote due around 1800 GMT
* New package includes VAT hike, pension changes
* Berlusconi under growing pressure over response to crisis
* Party ally says premier should step aside
By James Mackenzie
ROME, Sept 7 (Reuters) - Italian Prime Minister Silvio Berlusconi faces a confidence vote in the Senate on Wednesday following the latest changes to a widely criticised austerity package aimed at staving off financial crisis.
Late on Tuesday, the government yielded to growing calls for the package to be reinforced, increasing value added tax, extending the retirement age for women in the private sector and introducing a tax on very high earners.
Italian bond yields fell back early on Wednesday after Germany's constitutional court rejected a lawsuit aimed at preventing Berlin, the euro zone's effective paymaster, from participating in bailouts for struggling governments.
The vote is due at around 8 p.m. (1800 GMT). The package will then pass to the lower house for final approval at some time in the coming days.
International criticism has rained down on Berlusconi's centre-right government for the chaotic way in which it has responded to demands from the European Central Bank for clear and concrete plans to cut its mountainous public debt.
As the crisis has continued, Berlusconi's own position has come under growing pressure with Italian President Giorgio Napolitano, European partners, unions and Italy's business leaders all voicing increasingly direct criticism.
In a sign of growing unease among the scandal-plagued premier's own supporters, a senior member of the ruling PDL party said Berlusconi should quit and make way for a government of national unity, despite his clear parliamentary majority.
Former Interior Minister Beppe Pisanu, a founding member of Berlusconi's original Forza Italia party, told the La Repubblica daily that a broad alliance of all parties should be formed to steer Italy through the crisis until new elections in 2013.
"A pact for the end of the legislative period between all parliamentarians of goodwill to save the country and get it moving again (is needed)," he said.
BERLUSCONI WON'T GO
Berlusconi has repeatedly rebuffed calls to step down and Pisanu's comment was immediately rejected by Defence Minister Ignazio La Russa, who said: "Governments are appointed by voters, you don't make them as though you were in a kitchen."
Italy, the euro zone's third largest economy, has been at the centre of the debt crisis since the start of July when markets began to doubt its commitment to cutting its 1.9 trillion debt mountain.
Only intervention by the European Central Bank to buy Italian bonds has kept its borrowing costs from soaring out of control and destabilising the entire euro zone. But the ECB has warned that its support could not be taken for granted.
Berlusconi's centre-right coalition has been deeply split over whether to raise taxes or hit pensions with Economy Minister Giulio Tremonti, once seen as the guarantor of financial stability, appearing increasingly isolated.
Tuesday's decision to raise VAT represented a particular defeat following his long opposition to the move, but he had failed to come up with any alternative funding source.
According to a technical assessment provided by the Treasury, the one percentage point hike to 21 percent should bring in 700 million euros in 2011 and another 4.2 billion euros in 2013. The overall size of the package will increase to 54.2 billion euros by 2014, the assessment said.
As well as the VAT hike and a 3 percent levy on incomes above 300,000 euros, the already planned start of a gradual increase in the retirement age for women in the private sector will be brought forward to 2014.
The package also includes cuts to central and local government spending, a crackdown on tax evaders including prison sentences for serious offences and measures intended to lower the cost of Italy's tangled political system.
In addition, the government is planning a constitutional balanced budget amendment but the complicated political process needed to introduce such changes means that any measure could take months or even years. (Additional reporting by Giuseppe Fonte; Editing by Mark Heinrich)
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