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Last Updated: Tuesday, 14 June, 2005, 21:34 GMT 22:34 UK
Italy plans corporation tax cuts
Italian Prime Minister Silvio Berlusconi
Italy's economy is giving Mr Berlusconi a political headache
Italy is expected to push ahead with tax cuts, despite warnings from the European Union that its budget deficit is close to busting eurozone limits.

Prime Minister Silvio Berlusconi is set to reveal an 11bn euro (7bn) package of corporation tax cuts on Wednesday.

His government is looking to inject new life into Italy's economy, which is teetering on the brink of recession.

However, Italy is facing increasingly forceful calls from the EU to either trim spending or boost tax revenues.

More details

Mr Berlusconi and Economy Minister Domenico Siniscalco presented their plans to Italian regional politicians in Rome on Tuesday.

The idea is to cut regional corporation taxes by 1.7bn euros this year, with extra reductions pencilled in for 2006 and 2007.

Mr Berlusconi, who came to power amid promises of an economic revival, has said it is vital to reduce the burden on Italian businesses if Italy is to prosper.

The government already has cut income taxes by 6bn euros this year.

Mr Berlusconi and Mr Siniscalco were asked for more details of how they would finance the tax cuts, with concerns voiced that it may lead to a reduction in regional spending.

Opposition parties have attacked the move as a vote-winning ploy ahead of next year's elections and said it will damage the nation's finances.

Difficult choice

The concern is that Italy, which has to stick to strict economic rules because of its adoption of the euro, will have a budget deficit that tops EU limits.

Italy has to keep its budget deficit under 3% of annual gross domestic product (GDP) if it wants to abide by the Stability and Growth Pact - the rule book that governs membership of the single currency.

The problem now facing a number of eurozone countries is that economic growth has stalled in the years since they signed up for the euro.

In order to stoke growth, they claim they have little choice but to increase state spending and cut taxes.

Among eurozone states, Greece, France, Portugal and Germany have all breached the 3% ceiling.

Italy, meanwhile, is accused by the EU of miscounting its budget figures in 2003 and 2004 to ensure that its shortfall fell within Brussels' guidelines.

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