SILVIO BERLUSCONI’S decision to backtrack on his emergency austerity budget and scrap a proposed tax on the wealthy has triggered a popular outcry while risking market confusion and fresh confrontation with the European Central Bank.

The move was made by his centre-right government as Italy saw weaker than expected demand for its first auction of treasury debt since the ECB stepped in earlier this month to buy Italian bonds.

In return for bond purchases, Rome agreed to undertake sweeping cuts and impose structural reforms amid sovereign debt concerns.

Mr Berlusconi said in a television interview yesterday that revisions, which include scrapping a widely criticised tax on high earners and scaling back cuts to local authorities, made the budget “more equal”.

But labour unions and the opposition reacted with anger to the discovery that the changes would also delay retirement for many Italians by excluding from pension calculations years spent at university and in military service.

It was also unclear how the government would make up a budget shortfall of an estimated €4 billion as a result of the revision, analysts said.

The Bank of Italy warned yesterday that the country faced low growth because of the cuts.

Giada Giani, a senior economist at Citi, said the revisions “are definitely not a positive”. She told the Financial Times: “What is clearly negative is the number of times the government has changed the package, sending the wrong signal to the market – of confusion, of not knowing which decision to take.”

A senior Italian banker who declined to be named said: “It is a clear step from bad to vague.”

It is unclear how the ECB will react. The central bank will want to ensure the size of the overall austerity package remains unchanged and that the budget is balanced in 2013.

It also sees structural reforms as potentially more important than fiscal reforms.

Mario Baldassarri, chairman of the senate’s finance commission, said scrapping the wealth tax and cuts to local authorities would take away €5 billion in total from the austerity budget, offset by only about €500 million raised from other small reforms.

“There is the possibility that a balanced budget will not be reached by 2013,” Mr Baldassarri said. He added that the revised package did not contain the structural reforms required by the ECB.

Adding to mounting threats of civil action against the cuts, Italy’s doctors threatened to strike. They will be among the worst hit by the change to pensionable age, having spent longest at university.

Popular anger was also directed at the country’s top-earning footballers, who were exempted from the wealth tax, having threatened to strike over it. The tax will still be levied on members of parliament.

In the bond auction, Italy sold nearly €8 billion of government debt but met relatively weak demand, which threatened to reignite market pressure on the highly indebted country.

Bid-to-cover ratios for 10-year debt remained stubbornly low at 1.269, sending yield spreads over the equivalent German debt to 300 basis points, the highest level since the repurchasing programme resumed.

The rise in yields, which nonetheless stayed well below levels hit before the European Central Bank began buying Italian debt three weeks ago, raised questions about the sustainability of Rome’s funding efforts and threw the focus on to a Spanish bond auction tomorrow.

Analysts said the sale showed Italy was not facing an immediate funding crisis.

Traders said the ECB stepped in after the auction to buy significant amounts of 10-year Italian debt, halting the rise. – (Copyright The Financial Times Limited 2011, Reuters)