Italy's Renzi prepares new tax cuts as vote hurdle cleared

ROME (Reuters) - Italy's lower house of parliament approved a new electoral law on Wednesday aimed at ensuring more stable governments, giving a boost to Prime Minister Matteo Renzi as he prepares to unveil a package of tax cuts and economic reforms.

The reform, aimed at preventing a repeat of last year's deadlocked election by favouring bigger parties and stronger coalitions, must now go to the Senate, where it is likely to face additional amendments from Renzi's own centre-left Democratic Party (PD).

Replacing the widely criticised electoral system, parts of which have been ruled unconstitutional by Italy's highest court, has been seen as a test of 39-year-old Renzi's ability to pass wider reforms to help pull Italy out of its worst economic slump since World War Two.

Renzi, who reached an accord with centre-right leader Silvio Berlusconi before the package came to parliament, pressed hard for the bill to be approved before he presents his first concrete tax cuts since taking office.

His economic measures, expected to include 10 billion euros (8 billion pounds) in income tax cuts for low earners and more flexible employment rules to boost job creation, are intended to give a lift to a national mood darkened by two years of recession and record unemployment.

"On April 27, there will be another 100 euros in pay packets," Renzi was quoted as saying by the daily La Repubblica. He was due to unveil the measures at a news conference at 5 p.m.

(1600 GMT).

As well as the tax and employment measures, cabinet is due to sign off on legislation to increase access to housing and welfare, to settle unpaid bills owed to commercial suppliers by public authorities, and to fund school building maintenance.

The tax cuts will add a fresh burden to Italy's already strained public finances but officials in the prime minister's office said the government had already set aside around twice the amount needed to fund the measures.

The government has pledged broad spending cuts but few details have been given. Carlo Cottarelli, the official in charge of a spending review ordered by the last government, told the Senate on Wednesday that the government could achieve 3 billion euros in cuts in 2014.

REFORM DRIVE

The electoral reform is not directly connected with the economic measures but Renzi, who took office last month after ousting his party colleague Enrico Letta, could ill afford a delay on a measure he has been promising for months.

He has laid out an ambitious timetable, promising reforms to labour laws, the tax system and the bloated public administration within the coming months and he welcomed the lower house vote on electoral reform.

"Thanks to the deputies. They've shown we can really change Italy. Politics 1-Defeatism 0," he tweeted after the vote.

However, the bill approved in parliament has faced increasing criticism from within the PD, where party critics say Renzi made too many concessions to Berlusconi, whose agreement guaranteed the bill would pass without opposition from the centre-right.

"This law has to be improved in the Senate," former party leader Pier Luigi Bersani told SkyTG24 television. "I understand that we need agreements but I'm astonished to see Berlusconi having the final word, because that's how it looks in places."

The electoral law sets higher minimum thresholds for entry to parliament to limit the number of smaller parties, and provides for a run-off round to decide the winner if no coalition or party reaches a minimum of 37 percent of the vote.

Whichever side wins will benefit from a so-called "winner's premium", guaranteeing a clear majority.

However, it maintains aspects of the old law that were widely criticised, including the system of so-called "block lists" of candidates chosen by the parties, which does not allow voters to vote directly for individual representatives.

Most critically, it does not apply to the Senate, which has equal powers with the lower house. Renzi wants to reduce the Senate's status to that of a powerless regional chamber in order to make a stable parliamentary majority easier to achieve.

That change will require a constitutional amendment that could require a year or more to pass. Until it is, any new election would have to be conducted with two separate voting systems for the two chambers.

(Additional reporting by Giselda Vagnoni and Paolo Biondi; writing by James Mackenzie; Editing by Kevin Liffey)

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