Italian Prime Minister Romano Prodi's centre-left coalition unveiled its 1998 budget yesterday, saying the package would promote economic growth and ensure Italy became a founder member of the single European currency. Its key hard-left ally, Communist Refoundation, immediately lashed out at the 25 trillion lire (£10 billion) deficit-cutting budget and threatened to desert Mr Prodi if he pushed ahead with it.

The opposition centre-right bloc was equally hard-hitting, saying the budget would add further fiscal misery to an already overtaxed nation.

The draft budget was approved early yesterday after a marathon cabinet session and now goes to parliament, which has to ratify it before the end of the year.

The budget is divided into two sections, with 10 trillion lire expected from fresh revenues and 15 trillion lire coming from spending cuts, including around five trillion lire in controversial savings from a reform of the welfare state.

In addition, four trillion lire worth of incentives are being lined up for development projects, especially in the poorer south of Italy, which is ravaged by high unemployment.

"The government has managed to come up with a budget which is one of the least oppressive of the last 10 years and which will invest trillions of lire in employment and development," Deputy Prime Minister Walter Veltroni told a news conference.

But Communist Refoundation, whose support guarantees Mr Prodi a parliamentary majority, was livid. "We just don't buy it. We will vote against this budget," party leader Mr Fausto Bertinotti told reporters. "It seems that Prodi and his government have chosen a crisis course."

The budget does not specify how the welfare savings will be made, as Mr Prodi is waiting to strike a deal with unions first.

On the savings front, the government announced reductions to subsidies to state railways and the post office, cuts in fund transfers to local authorities, lower health spending and a crackdown on bureaucratic waste.

Mr Veltroni said the budget as a whole would reduce Italy's deficit to 2.8 per cent of gross domestic product in 1998 from a projected 3.0 per cent this year, allowing Italy to respect the conditions laid down in the Maastricht Treaty for euro-hopefuls.