Italy to raise VAT and add 3% levy to high incomes

ITALY’S centre-right government promised yesterday to hike VAT, as it bowed to market pressure for more action on its swollen debt and ignored mass street protests against its austerity measures.

With Italian bonds coming under renewed attack, Prime Minister Silvio Berlusconi met ministers as the senate began a debate, opening the way for approval of the €45.5 billion package today.

The air of crisis was heightened by anti-austerity rallies across the country after Italy’s powerful CGIL union called a one-day strike to protest against the programme, which includes a measure it says will make it easier to sack workers.

After days of fruitless wrangling over funding gaps in the plan, the government agreed to raise the 20% VAT bracket to 21% in a move that employers federation Confindustria estimated could raise €3.7bn a year.

It also set a special 3% levy on incomes of over €500,000, although to add to the already high level of confusion over the package, Defence Minister Ignazio La Russa said later that the threshold would be lowered to €300,000.

Ministers will also approve the introduction into the constitution of a “golden rule” on balanced budgets and transfer provincial government functions to the regions in a move to simplify local administrations.

Other changes would delay retirement for women employed in the private sector from 2014.

A confidence vote will be called, which should see the package passed in the senate today, offering some reassurance ahead of Thursday’s meeting of the European Central Bank governing council, which has been pushing Rome for action.

Approval in the lower house would then be needed for the package to be passed.

“The VAT hike and the willingness to work on pension reform will help reassure markets,” said Barclays Capital economist Fabio Fois.

“That said, in order to turn market sentiment decisively, they have to work more on growth measures.”

With markets alarmed at Italy’s lack of progress in reining its €1.9 trillion debt, Rome’s borrowing costs have risen inexorably for more than a week, despite intervention by the ECB to hold yields down by purchasing Italian bonds on the market.

Italy’s European partners have been furious at the government’s handling of the austerity measures with European Energy Commissioner Guenter Oettinger, delivering a brutal assessment late last night.

“Italy is governed appallingly badly,” the former premier of the German state of Baden-Wuerttemberg told a conference in Berlin.

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