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Last Updated: Friday, 30 September 2005, 05:13 GMT 06:13 UK
Crucial Italian budget approved
Silvio Berlusconi
Silvio Berlusconi is facing re-election next year
Italian ministers have approved a controversial budget aimed at lowering the country's rising deficit.

After crunch talks, Italy's Cabinet approved measures to cut the deficit by 11bn euros (7.5bn) and put forward plans to boost its sluggish economy.

With elections due next year, Prime Minister Silvio Berlusconi faced opposition to his proposals from some members of his ruling coalition.

The budget proposals must now be approved by both houses of Parliament.

Financial rigour

Silvio Berlusconi's government is under pressure to curb its budget deficit which has exceeded EU limits for several years.

The budget proposals, announced late on Thursday, include $16bn in spending cuts designed to reduce Italy's deficit.

There is clearly a big risk that the budget numbers aren't going to add up
Marco Valli, UBM economist

Areas targeted include civil service and regional health spending, which will both be cut. There will also be a clampdown on tax evasion and a freeze on public sector hiring.

The budget also includes $4bn worth of investment to boost economic growth, which has languished at an average of 1% a year since 2001.

There would be tax breaks of more than 1bn euros for families while companies would have to pay 2bn euros less on social security costs.

Prime Minister Silvio Berlusconi said the proposals were fiscally responsible.

"It certainly isn't an electoral budget," he said.

"We are keeping to our word with absolute rigour,"

Budget pressure

Italy's last budget before elections next year has proved highly contentious.

Finance minister Domenico Siniscalco quit last week amid claims that he was exasperated about divisions over the budget.

Italian workers protesting job cuts
Unions have said they will not tolerate huge spending cuts

Italy has been put on notice to reduce its budget deficit, which is forecast to hit 4.3% this year.

EU rules governing the single currency require countries to keep their budget deficit below 3% of gross domestic product.

Big risk

Next year's budget is designed to bring the deficit down to 3.8% but unions have warned that they will oppose cuts in spending on health and welfare services and may consider strike action.

One economist said the jury was out on how successful the budget would prove in bringing the deficit below 4%.

"Overall, ahead of a general election, there is clearly a big risk that the budget numbers aren't going to add up," said Marco Valli, an economist with UBM.

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