By Steve Scherer
ROME (Reuters) - Italian Prime Minister Matteo Renzi on Friday won a confidence vote in the Senate on next year's budget that scraps a hated tax on primary residences and slows deficit reduction.
The Senate voted 164 to 116 to approve the government's spending package, which now faces approval in the lower house. By law, the budget must be passed by the end of the year.
Renzi staked the fate of his government on the confidence vote in order to accelerate the bill's passage in the Senate, where it may have to return if it is amended in the Chamber of Deputies.
Renzi has said tax cuts will bolster Italy's fledgling recovery. This year the economy, the euro zone's third biggest, emerged from a three-year recession, but growth unexpectedly slowed in the third quarter.
The bulk of next year's tax cuts will come from the abolition of a housing tax, TASI, at a cost of some 3.5 billion euros ($3.74 billion) to the state.
The budget also eliminates levies on agricultural and industrial equipment, offer tax breaks to companies that invest in machinery and equipment, and reduces the television license fee.
To make room for more spending, the government hiked its 2016 deficit goal to 2.2 percent of output from 1.8 percent previously, and marginally raised the forecast for public debt, the highest in the euro zone after that of Greece, to 131.4 percent of gross domestic product (GDP) from 130.9 percent.
The European Commission said this week Italy was among four countries whose 2016 budget risked breaking EU rules as it slowed the pace of previously agreed fiscal consolidation.
The commission has also said that high-tax countries like Italy should instead increase property levies to make room for reductions in labor taxes, which it says would have a better impact on employment and growth.
($1 = 0.9348 euros)
(Reporting by Steve Scherer; Editing by Angus MacSwan)