Italian Prime Minister Mr Silvio Berlusconi yesterday claimed victory in his battle to cut taxes and improve the state's efficiency after parliament gave final approval to his centre-right government's 2005 budget.

"This budget can be called epochal and signals a profound change," he said after the Senate, parliament's upper house, passed the measure by 164 votes to 72.

"From now on, the state will ask for less money from citizens to do its work. The budget allows us to look at a state that will be more agile and less expensive."

The budget contains about €6 billion of tax cuts, mostly reductions in income tax, that amount to about 0.5 per cent of gross domestic product.

Although many economists doubt the measure is far-reaching enough to boost the economy significantly, the cuts fulfil a promise Mr Berlusconi made in his 2001 election campaign.

He is seeking re-election in early 2006 and, after a testing period of disputes with his coalition allies between June and November, is profiting from divisions that have emerged over the past month in the opposition.

For Italy's European Union partners and the European Commission, one key question is whether the cost-cutting measures included in the 2005 budget, partly to pay for Mr Berlusconi's tax cuts, will be sufficient to keep Italy's budget deficit under control.

Financial Times Service