Italian Premier Romano Prodi said on Tuesday that the government's deficit-busting plan had worked.
Speaking at an international business conference here, the premier said that "in a year, the public accounts have been completely consolidated".
"The accounts emergency is over although a lot still remains to be done," said Prodi, who came to power in April 2006.
He said Italy's budget deficit was expected to fall back below the European Union's 3% cap to 2.3% this year, from 4.4% in 2006.
The 2006 deficit was the highest in ten years and meant that Italy had breached the EU's 3% deficit cap for four years running.
Straightening Italy's public accounts has been a priority for the centre-left government, which 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 premier acknowledged that his popularity had suffered as a result.
"I decided to adopt a very rigorous strategy knowing that I would be forced to pay the price politically," he said.
"Now we have to wisely manage the good results achieved in order to guarantee stable growth," the former European Commission chief said.
For this year, GDP growth is put at 2.2%, which would be the economy's best performance in seven years.
From 2001-2005, GDP growth averaged less than 0.7% per year but revived in 2006 with a rise of 1.9%.
Meanwhile, a tax revenue boom and a GDP revival have left the government with some 10 billion euros which it did not expect to have.
Prodi 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.
Italy's debt mountain is the third biggest in the world. It is forecast to drop to 105.4% of GDP this year compared to 106.8% last year.
Brussels is pressuring the government to put all of the extra revenue into lowering the debt.
But the government is hoping to rake in further funds through a tough anti-tax evasion programme involving increased inspections and measures making it more difficult for tax dodgers.
The tax office said on Tuesday that it had recovered 3.4 billion euros in evaded taxes last year, an increase of 50% over the previous year.
It said that out of almost 500,000 tax inspections carried out in 2006 (14% more than in 2005), irregularities were uncovered in 95%.
According to a recent report by one of the country's main economic think-tanks, Italy's underground economy equals almost 30% of the country's GDP.
The report by the independent Eurispes institute said underground businesses generated more than 300 billion euros a year.
Some 5.65 million Italians regularly work off the books while tax evasion deprives the state of more than 132 billion euros a year, Eurispes said.
In a 2003 report, the International Monetary Fund issued data that corresponded with Eurispes' findings.
