The Italian government approved early on Wednesday a $12.9-billion (10-billion-euro) austerity budget for 2013 that contained several tax hikes and spending cuts, but also a reduction in income tax.
Prime Minister Mario Monti's technocratic administration had pledged to find enough resources to stave off a planned two-point increase in value added tax (VAT) to 23 per cent, which was due to enter into force on July 1, 2013.
Instead, it decided to let VAT rise from 21 to 22 percent, but also approved a reduction in income taxes from 23 to 22 percent for people earning less than 15,000 euros a year and from 27 to 26 percent for those earning between 15,000 to 28,000 euros.
Monti said the tax cuts were now possible because earlier austerity measures had stabilized public accounts. "We can start to appreciate how budget discipline pays, is worth it," the premier told reporters.
Separately, national statistics office Istat announced a 1.7-percent monthly increase in industrial production in August. Economists were expecting a 0.4-percent decline.
"Today's strong outcome should not be overemphasized, as industrial production data tend to be very volatile during the summer and are often subject to revisions," analysts from UniCredit bank commented.
Monti's government, which introduced a hefty property levy when it came into office last year, had been under pressure to cut taxes to revive an economy which is expected to remain in a recession until next year.
Wednesday's package - approved after a lengthy cabinet meeting which started on Tuesday afternoon and continued into the night - also cut public spending by 3.5 billion euros, and introduced a financial transaction tax agreed Tuesday at European Union level.
Consumer association Codacons protested that the government's package contained more tax hikes than tax cuts, calculating that the yearly bills of the "average family" will increase by 273 euros as a result of the measures announced.
The budget law still needs to be approved by parliament, where it could be significantly amended. But it will need to be consistent with Italy's EU commitment of achieving by 2013 a "structural" budget balance - that is, net of the negative effects of recession.
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