* 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 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