Italy eyes tax hikes as cabinet meets on crisis

By James Mackenzie

ROME (Reuters) - Prime Minister Silvio Berlusconi called an emergency cabinet meeting on Friday to adopt measures expected to include tax hikes and spending cuts to shore up confidence in Italy's strained public finances.

The meeting at 7.00 p.m. (1 p.m. EDT) comes in response to demands from the European Central Bank for urgent reforms to bring the budget into balance by 2013 and spur growth in Italy's chronically stagnant economy.

European markets have swung wildly this week on rumors about the health and funding needs of indebted euro zone governments.

After days of criticism for a lack of clarity on its plans, Italy's center-right government looks set to levy a "solidarity tax" on high earners and raise the tax level on financial revenues, Italian newspapers reported on Friday.

The measures were agreed in late-night discussions between Economy Minister Giulio Tremonti and Prime Minister Silvio Berlusconi but other steps, notably those concerning pension reform, remain to be decided.

The government is looking for 20 billion euros' worth of extra savings and revenue to meet its new balanced budget target and reassure panicked financial markets it can control public debt running at 120 percent of gross domestic product.

Berlusconi and Tremonti held a series of meetings on Thursday with President Giorgio Napolitano and Bank of Italy Governor Mario Draghi as they scrambled to nail down details of the package.

Business daily Il Sole 24 Ore said the "solidarity tax" would take the form of a 5 percent addition to tax on income above 90,000 euros and a 10 percent addition to tax on income above 150,000 euros.

The tax rate on financial income would go up to 20 percent from 12.5 percent with the exception of income from government bonds, it said.

Additional measures could include a rule ensuring that non-religious public holidays, such as the June 2 anniversary of the founding of the Italian Republic are celebrated on a Sunday in a bid to increase the number of working days in a year.


The market turbulence which threatened to spin borrowing costs out of control last week has eased after the ECB stepped in to buy Italian bonds but heavy falls on the stock market have underlined the continuing fear among investors.

On Friday, bourse regulator Consob announced a temporary ban on short-selling financial stocks in a bid to calm the volatility that has hammered Italian bank shares and the main Milan index traded nearly 2 percent higher early on Friday.

Despite its huge public debt, Italy had remained largely on the sidelines of the euro zone crisis until last month when doubts about the government's unity and capacity to control finances triggered a massive selloff of Italian bonds.

Italian media reported that Berlusconi was considering issuing a special video message to explain the austerity plan, which will fast-track a number of measures contained in a 48 billion-euro package passed in parliament last month.

But major disagreements still remain and sensitive reforms to the pension system appear still undecided, with Berlusconi's Northern League coalition partners and Italy's biggest trade union both strongly opposed to any cuts.

On Thursday, Tremonti told a parliamentary committee that the ECB had asked for a series of measures to break down barriers to competition in services and the professions and free up rigid labor market rules.

The recommendations included full liberalization of local public services and the professions, more flexible employment contracts, easier hiring and firing to free up the rigid labor market and cuts to public sector pay.

Additional measures included increasing the retirement age for women working in the private sector and a change in rules on when workers can retire based on their pension contributions.

Tremonti said the proposals on hiring and firing and cuts to public sector pay, both of which would raise fierce political opposition, were not in the government's plans.

(Editing by Andrew Roche)