Italian Prime Minister Mario Monti said on Wednesday his government will cut income tax in the two lowest bands next year after a tense cabinet meeting on budget measures that ran late into Tuesday night.

The income-tax rate will be cut to 22 percent from 23 percent for those earning less than 15,000 euros (19,283 U.S. dollars) per year, and to 26 percent from 27 percent for salaries between 15,001 and 28,000 euros, while the top three bands will remain unchanged.

Monti expressed satisfaction at the income-tax cuts, saying the cuts would primarily benefit lower earners and showed the policies of the government of non-political technocrats were working.

"Today we can see and feel that budget discipline pays and it is beneficial," Monti told a press conference.

"We can allow some moderate relief as start in the reduction of income tax," the prime minister said.

In addition, according to ANSA news agency, Monti said a 2-percent increase in value added tax (VAT) scheduled for July 2013, which the government had hoped to avoid, will be halved to 1 percent rather than being scrapped completely.

So the VAT will go up from 10 percent to 11 percent in the lower band and 21 percent to 22 percent in the top band, he explained.

Monti stressed that the budget measures, contained in the so-called Stability Law, did not amount to another austerity package like the tax hikes and spending cuts his emergency government passed last year to put Italy on track to balance its budget in structural terms next year.

But the measures still featured new cuts, including a reduction of over 1 billion euros on health spending, which reportedly caused Health Minister Renato Balduzzi to threaten to resign at the cabinet meeting.

Local analysts believe Monti's austerity measures helped prevent Italy from following Greece on the path towards a default on its massive national debt but the measures have deepened the recession the country slipped into last year. (1 euro = 1.29 U.S. dollars)