ROME (Reuters) - Italian Prime Minister Enrico Letta defended budget rigour on Thursday, sending a clear message of caution to an ally in his fractious coalition who wants a hated property tax eliminated by the end of next month.
One of Letta's main supporters, the centre-right People of Freedom (PDL) party, has said the government's survival depends on abolishing a tax on primary residences, which brings in about 4 billion euros ($5 billion) in revenue per year.
Number crunchers for the ruling bloc failed earlier this week to agree an alternative to the tax, known as IMU, but said they would still try to seek a solution by the end of August, two weeks before annual payments of the tax come due.
Squabbling in the left-right coalition has hurt the government's approval rating, which has dropped 6 percentage points in the three months since it was formed, to 42 percent, a polled showed on Monday.
Italy was taken off special EU budget surveillance earlier this year after exceeding the deficit ceiling in 2009, and that should give the country more spending flexibility next year, Letta said.
"It's necessary to continue with the policy of budget rigour. The public accounts must remain in order," Letta told the Senate during question time.
Thanks to Italy's efforts to lower its deficit in recent years, the country "will have extra flexibility that will allow us in 2014 to make new investments that Brussels will allow precisely because we have been virtuous," Letta said.
Letta's main challenge is to stimulate growth and end the longest postwar recession in the euro zone's third-biggest economy without pushing up deficit spending.
Data from the first half of the year show Italy is on track to keep the deficit below the European Union ceiling of 3 percent of gross domestic product this year, Economy Minister Fabrizio Saccomanni said on Thursday.
Four-times Prime Minister Silvio Berlusconi's PDL holds that eliminating the property tax is key to pulling out of recession, while Letta's own Democratic Party (PD) wants it removed only for low earners.
Saccomanni has said he does not know how to fund a complete removal of the tax, and he echoed Letta on Thursday, saying Italy must maintain budget discipline to keep borrowing costs low and underpin an economic recovery.
"Given the elevated level of public debt, an attentive management of public finances is absolutely necessary in order to contain borrowing costs and to create favourable conditions for a durable economic recovery," Saccomanni said in Senate testimony.
Saccomanni also said he will seek to pay an additional 10 billion euros in debts the state owes to companies this year, on top of the 20 billion euros already set aside. The minister says the payment of the arrears will boost growth at the end of this year. ($1 = 0.7555 euros)
(Editing by Ruth Pitchford)