The Italian government's deficit-busting plan is working, according to forecasts presented by national statistics bureau Istat on Monday.
Istat said the budget deficit was expected to fall back below the EU's 3% cap to 2.3% this year, from 4.4% in 2006.
The bureau also forecast improvements on the public debt front.
It said Italy's debt mountain, the third biggest in the world, would drop to 105.4% of GDP this year compared to 106.8% last year.
As for the primary surplus (state revenue not including net interest payments on the public debt), Istat said it would climb to 2.6% having plunged to almost zero in 2006.
On a bleaker note, Istat said that the interest Italy would have to pay on its debt was expected to rise to 4.9% of GDP, almost 74 billion euros, compared to 4.5% in 2006.
Consolidating Italy's public accounts has been a priority for the centre-left government of Premier Romano Prodi, which came to power a year ago.
The government forced through an unpopular, 34.7-billion-euro budget containing extensive tax hikes and spending cuts.
Prodi and Economy Minister Tommaso Padoa-Schioppa insisted the hefty manoeuvre was essential for curbing Italy's rising deficit and debt levels and meeting EU public accounts targets.
The European statistics bureau, Eurostat, issued data on Monday confirming a budget deficit of 4.4% for Italy in 2006.
Although this was its highest level in ten years and meant that Italy had breached the EU limit for four years running, the bureau stressed that one-off factors had weighed heavily on the deficit, which otherwise would have dropped to 2.4%.
In particular, it cited a September European Court of Justice ruling nixing Italy's VAT regime on company cars.
The ECJ rejected Italian legislation limiting the deduction of value-added tax on company cars which are also used for private purposes, forcing the state to refund some 16 billion euros to claimants for the period 2003-2006.
Eurostat also highlighted Italy's high public spending, saying it rose almost 2% to 50.1% of GDP in 2006, compared to an EU average of 47.4%.
ACCOUNTS CONSOLIDATION NOT OVER.
Padoa-Schioppa, the architect of the 2007 budget, declared last week that Italy's "public accounts emergency" was over but that much remained to be done.
"The consolidation isn't yet complete. That can be considered done when the deficit is down to zero, public debt is below 100% of GDP and the primary surplus is at 5%," said the minister, a highly respected economist who was a founding member of the European Central Bank.
Nonetheless, a tax revenue boom and a GDP revival have left the government with some 10 billion euro extra which it did not expect to have.
The economy minister has said 2.5 billion of the "mini-treasure", as it has been dubbed by the media, will go towards social welfare while the rest will be used for debt reduction.
The Italian economy posted its best performance in six years in 2006, with growth of 1.9%.
The data appeared to confirm that Italy was emerging from a prolonged period of economic stagnation. From 2001-2005, GDP growth averaged less than 0.7% per year.
For this year, GDP growth is put at 2.2%.
