Rome - Silvio Berlusconi, Italy's prime minister, on Wednesday 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 €6bn ($8.2bn, £4bn) 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 successful election campaign of 2001.

The premier 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 centre-left opposition.

The Udeur, a moderate opposition party, decided on Monday to leave the centre-left's ranks after a quarrel over how to fight regional elections next April. Although the Udeur may be lured back, some of Mr Berlusconi's centre-right forces are tempting it with offers to join the government camp.

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. The government predicts that the deficit will fall to 2.7 per cent of GDP next year from an expected 2.9 per cent this year.

But the Commission, the International Monetary Fund and financial markets are concerned that about one-quarter of the roughly €29bn worth of deficit-cutting measures is represented by short-term revenue-raising schemes, such as fines imposed on Italians who have been given amnesty for illegal construction work.

Mr Berlusconi's income tax initiative cuts the number of tax brackets from five to four, ranging from 23 and 33 per cent for lower earners to 39 and 43 per cent for wealthier Italians. He is planning more tax cuts in the 2006 budget, in time for the next election.