By Giuseppe Fonte
ROME (Reuters) - Italian Prime Minister Enrico Letta promised a wide reform of property taxes on Friday, addressing one of the main issues dividing his coalition government, but gave no details on where he would find the billions of euros to pay for it.
He confirmed pledges to suspend the widely hated IMU tax on principal residences brought in by his predecessor Mario Monti but held back from the demands of center right members of his fragile left-right coalition for it to be scrapped entirely.
Nonetheless the suspension of payments due next month was welcomed by center-right leader Silvio Berlusconi, who made abolishing the tax one of the centerpieces of his recent election campaign.
"Our first success is that already in June we won't have to pay," he said in a video message on his Facebook page.
Letta has had to balance pledges to keep Italy's budget deficit below European Union limits of 3 percent of gross domestic product with the priorities of his diverse coalition, cobbled together two months after an inconclusive election.
"The choices we make will be within these horizons but they will be markedly pro-growth," Letta told reporters after a cabinet meeting to approve the decree passing the measures.
A spokesman for the European Commission, which decides later this month whether to end the so-called excessive deficit procedure against Italy following cuts to its fiscal gap, welcomed the government's pledge to stick to its budget targets.
Letta did not detail where the money would come from but Deputy Prime Minister Angelino Alfano, from Berlusconi's center-right People of Freedom (PDL) party, said the suspension would be financed by cuts to spending.
Letta also set aside 1 billion euros to ensure continued unemployment benefits for workers placed in special temporary redundancy schemes, part of which would be paid for by funds aimed at increasing productivity in the economy.
National statistics agency ISTAT confirmed this week that Italy, the euro zone's third-largest economy, was in its longest recession since quarterly records began in 1970 and Letta has made reviving growth and cutting soaring youth unemployment his top priorities.
Confidence in his government has dropped sharply, according to an opinion poll for the SWG institute for RAI state television, which showed its approval rating had fallen from 43 percent at the start of the month to just 34 percent currently.
Payments on IMU due in June, affecting around 15 million homes, will be pushed back until September, pending a broader reform of the overall system of property taxes which Letta said would be completed by August 31.
The regionalist Northern League party, which does not support the government, dismissed the decree as "blowing smoke in the eyes of Italian citizens" and said its only purpose was to ensure the government lasted until September.
The measures, which cover certain agricultural buildings but exclude luxury residences, leave the government needing to find 2 billion euros immediately to help cash-strapped local authorities, which depend on the tax to fund municipal services.
The planned reform would not just cover housing tax but a wide spectrum of levies including those on local waste collection and property registration, transfers and sales.
Letta said he wanted to allow companies to deduct property tax payments from taxable corporate income as part of measures to help business.
The head of the Confindustria business lobby, Giorgio Squinzi, as well as economists from international bodies such as the Organisation for Economic Cooperation and Development, have said the priority should be on cutting payroll charges rather than housing tax.
But IMU has become a banner issue for the PDL, which has repeatedly demanded its complete abolition for primary residences as well as the repayment of contributions paid in 2012, a move which would cost around 8 billion euros.
Letta's own center-left Democratic Party wants a more limited cut, to ensure that lower income families drew the greatest benefit. It says the main priority should be finding ways to head off a planned increase in sales tax due to come into effect in July.
(Additional reporting by Francesco Guarascio in Brussels; writing by James Mackenzie; editing by Gavin Jones and Philippa Fletcher)