Italy to hike VAT as strikers protest austerity

Italy's centre-right government promised on Tuesday to hike value-added tax 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 euro package on Wednesday.

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 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 percent VAT bracket to 21 percent in a move that employers federation Confindustria estimated could raise 3.7 billion euros a year.

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

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 Senate on Wednesday, 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 euro 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.

The premium that investors require to hold Italian paper rather than benchmark German bonds reached 369 basis points by late afternoon on Tuesday, more than 30 points above the equivalent Spanish spread.