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Italy Prime Minister Monti announces surprise income tax cut

ROME--Italy's government unexpectedly cut income tax rates for the country's lowest earners while promising to stick to the budget goals it has agreed with the European Union.

After an eight-hour cabinet meeting that ended early on Wednesday, the government said it would also halve a planned increase in sales tax rates to a single percentage point.

Italy holds parliamentary elections in about six months.

“Today we can see that budget discipline pays and makes sense” because “we can allow ourselves some moderate relief,” Prime Minister Mario Monti told reporters after the meeting.

The severe austerity imposed by Monti since he took over an unelected government in November has exacerbated a year-long recession in the eurozone's third-biggest economy and been a focus of criticism by all political factions.

He increased taxes and cut pensions to put the public accounts on track and head off a Greek-style debt disaster.

Monti has repeatedly denied he would stand in the election but did say he would serve his country again if asked following the vote.

Italy will reduce by a percentage point the two lowest income tax rates.

The rate will drop to 22 percent from 23 percent for those earning less than 15,000 euros per year, and to 26 percent from 27 percent for salaries between 15,001 and 28,000 euros. The top three rates will remain unchanged.

Italy will balance its budget in structural terms next year, as it has pledged its EU partners it would do, according to a statement from the cabinet meeting.

A second round of cuts to health care spending and other state expenditure, a new tax on financial transactions and “fiscal interventions” for banks and insurance companies will help pay for the measures, according to a statement.

The savings should amount to 3.5 billion euros per year when at full regime, the government said. Savings from a previous round of spending cuts will total 4.4 billion euros this year, and 10.3 billion euros next year.

Also decided during the cabinet meeting was a reform to the constitution to centralize spending controls over the country's 20 regional governments, which have been the focus of a recent series of high-profile corruption scandals.

That will involve reforms designed to regain coordination of spending on energy, tax collection, and the national transportation network.

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