Italy govt approves 2008 budget, says promises kept

ROME, Sept 29 (Reuters) Italy's government on Saturday approved the 2008 draft budget containing tax and spending cuts which Prime Minister Romano Prodi hopes will help revive his flagging approval ratings.

A surge in tax revenues over the last 18 months means Prodi's administration does not believe it needs any draconian belt-tightening to cut next year's public deficit to 2.2 percent of GDP from a targeted 2.4 percent this year.

The package is broadly neutral in fiscal terms, with 11.5 billion euros of spending cuts and higher-than-targeted tax revenues offset by welfare measures and lower housing and corporate taxes.

''This is the budget that keeps its promises,'' Prodi told reporters after an 11-hour cabinet meeting which ended around 0430 local time. ''It marks the begining of a normal economy that doesn't need extraordinary financial operations.'' The bill must be passed by both houses of parliament by Dec. 31, usually after considerable changes, to become law.

Prodi will hope the passage will be less rocky than last year, when in-fighting over amendments to began his slide in popularity.

Last year's package involved far more contentious measures needed to slash the deficit by around 15 billion euros.

No details of the budget were released after its approval, but while the cabinet debate was still in progress, ministers told reporters it would cut public spending, mainly the civil service bureaucracy, by almost 5 billion euros, and probably reduce the rate of the main corporate tax, IRES, to 28 percent of company profits from 33 percent.

There would be no increase in taxation of earnings from financial intruments, as had been rumoured.

''GOOD NEWS'' The prime minister's office said a news conference would be held at around 0900 GMT local time to illustrate the measures.

IRAP, another tax on businesses which is applied regionally, is expected to have been cut to 3.9 percent from 4.25 percent.

In addition, the cabinet approved emergency legislation for 7.5 billion euros of extra spending this year, made possible by higher-than-targeted tax revenues.

These resources will largely be used for one-off extra welfare provision for families and the very poor, and investments in railways, roads and urban underground systems.

''This budget has 100 pieces of good news for Italians,'' Cabinet Undersecretary Enrico Letta told reporters. ''Now, thanks to our fight against tax evasion, we are in a condition to be able to give back resources.'' The government on Friday trimmed this year's economic growth forecast to 1.9 percent from 2.0 percent and cut next year's projection to 1.5 percent from 1.9 percent in the wake of weak second-quarter growth and recent financial market turmoil.

Prodi's centre-left government is lagging far behind Silvio Berlusconi's opposition in opinion polls and, after 16 months in office, its approval ratings are at record lows.

The nine-party ruling coalition is riven by divisions over the economy and foreign policy, as well as by personal clashes.

Italy's budget deficit has exceeded the EU's 3 percent ceiling for the last four years and last year's deficit of 4.4 percent was the highest for a decade.

The economy, while recovering in the last two years thanks to the global and European upswing, has remained one of the most sluggish in the euro zone for at least a decade, a trend expected to continue in 2008.

REUTERS KR HS1344