June 30, 2011 / 10:34 AM / 8 years ago

Italy cabinet due to approve tough austerity plan

ROME (Reuters) - Prime Minister Silvio Berlusconi’s cabinet is set to approve on Thursday an austerity package meant to shield Italy from the Greek debt crisis and eliminating its budget deficit.

The budget, worth some 47 billion euros ($66.55 billion), has heightened tension within Berlusconi’s center-right coalition. His restive Northern League ally has warned the government is at risk until the package is passed.

A meeting between Berlusconi and coalition leaders this week appeared to sooth feelings and reach broad agreement on the package, though no final decisions have been taken and the budget is almost certain to face hurdles in parliament.

The bulk of the 47 billion euros in savings needed to eliminate the deficit by 2014 will come from cuts in the budget of government ministries and local authorities and a cut in tax breaks for companies and families, government sources say.

Key points of contention are plans to raise the retirement age for women and cuts to local government spending, which the pro-devolution Northern League opposes.

Markets and ratings agencies were watching closely for any signs of backsliding. Yields on Italian 10-year bonds auctioned on Tuesday hit their highest level since October 2008.

The deficit is targeted at 3.9 percent of gross domestic product this year, down from 4.6 percent in 2010.

The budget is the latest test for Berlusconi, who absorbed resounding defeats in local elections and four referendums over the last month. His approval ratings have been sinking over a series of corruption and sex scandals and a stagnant economy.

Squabbling within his coalition is rife. Economy Minister Giulio Tremonti was forced to deny newspaper reports on Tuesday that he was ready to resign if his plan was not accepted.

Moody’s and Standard & Poor’s have warned they may cut Italy’s credit rating because of its inability to pass reforms to bring down its debt mountain, which at 120 percent of gross domestic product is one of the world’s biggest.

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