UPDATE: Italy's Tremonti To Chair New Panel On Econ Policy

MILAN -- Italy's popular Prime Minister Silvio Berlusconi and his powerful finance minister Giulio Tremonti have patched up their differences over tax cuts with a power-sharing compromise.

Berlusconi's PDL party will create a new committee early next month to coordinate economic policy with Economy Minister Giulio Tremonti, an Economy Ministry spokeswoman said Wednesday.

She said Italy's economic policy will continue to be "one of both rigor and of growth." Asked if Italy has immediate plans to cut taxes, she said: "Gradual tax cuts are part of our party program."

The center-right won Italy's elections last year on a platform that included a pledge for a "gradual and progressive cut" in a regional tax called IRAP. The program, however, also called for Italy to keep its public accounts "balanced" and to "respect its European commitments" as a euro-zone member.

Tremonti was responsible for writing large portions of the Berlusconi party's winning platform, calling it a "realistic platform" at the time.

"The minister and the prime minister will take economic decisions together," said the Economy Ministry spokeswoman. "On Nov. 5, or perhaps sooner, a new committee will be formed that will coordinate economic policy with the minister," she added.

Tremonti will chair the committee, which will be nominated by PDL, or Popolo della Liberta', Italy's largest party.

"Italy's economic policy has not changed," the spokeswoman said.

Tremonti and Berlusconi have clashed in recent days over Berlusconi's impromptu promise to cut IRAP, which brings EUR40 billion to the state's coffers and is used to pay for health spending.

Tremonti is a fiscal hawk who aims to hold the line on spending to keep Italy's deficit from ballooning.

The decision to form a committee is a signal that the conflict between Berlusconi and Tremonti is over, for now.

Berlusconi said late Tuesday on a television talk show that "fiscal rigor is the government's policy, not just Tremonti's policy."

Investors will be watching for signs that Italy's 2010 budget, which is now working its way through parliament, could be tweaked to add tax cuts due to pressure from the new committee.

Germany's new government, for example, is pursuing a growth policy fueled by EUR25 billion in tax cuts.

With debt at 115% of gross domestic product in 2009, Italy has little leeway to cut taxes or spend its way out of recession. The country expects its budget deficit to reach 5.3% of GDP this year.