Premier targets those who earn less than €1,500 a month as he announces €10bn worth of tax cuts to kickstart economy

Italy's new prime minister has promised to put an extra €1,000 per year in the pockets of the country's low-paid workers as part of €10bn worth of tax cuts that he hopes will help jolt the eurozone's third-largest economy out of the doldrums.

In his first major pledges on economic policy since ousting his predecessor and party rival Enrico Letta last month, centre-left leader Matteo Renzi targeted those Italians who earn less than €1,500 a month, as well as outlining measures to help businesses.

"We have never seen a project of reforms this substantial or significant," he said at a press conference on Wednesday at which he also confirmed his intention to clear the public administration's remaining €68bn arrears to the private sector by July, without explaining exactly how he would do it.

Other steps included a €500m fund for social entrepreneurs and €3.5bn for school maintenance.

Italy's youngest prime minister said the money for the measures would come from spending cuts, and insisted he would keep the country within the 3% budget deficit limit set by Brussels.

Italy has only just come up for air from a suffocating recession that saw the economy contract for nine straight quarters. Growth of 0.1% was recorded in the final three months of last year.

As well as the economy, Renzi, 39, is pursuing an ambitious series of constitutional changes which, if passed, would also see Italy's upper house of parliament transformed, and an entire layer of local government abolished.

On Wednesday his coalition government received a boost when the lower house of parliament approved a flagship electoral reform law aimed at giving Italy a new voting system that does not lead to political gridlock.

After a stormy passage through the chamber of deputies that exposed the deep divisions within his own centre-left Democratic party (PD), the bill was approved by 365 votes to 165, relying on a deal cut in January between Renzi and the centre-right leader, Silvio Berlusconi.

In a show of protest, MPs in Beppe Grillo's opposition Five Star movement (M5S) held up pictures of Renzi and Berlusconi united by a red heart alongside the words "condemned to love". The deal also caused outrage among many in the PD.

But Renzi was unrepentant. He welcomed the bill's approval on Twitter, declaring the move a 1-0 victory for politics over defeatism. "[Lower-chamber MPs] have shown that we really can change Italy," he wrote.

The champagne, however, will be kept on ice. Despite having been given the green light in one chamber, the bill now has to go to the senate for another lengthy, and probably even stormier, debate. That in itself is a clear indication, says Renzi, of the need for radical institutional reform.

He said the new electoral law would prevent the re-election of a grand coalition by providing for a runoff in the event of no party or formation winning more than 37% of the vote. It would also reduce the power of smaller parties, raising the thresholds below which a party will be unable to enter parliament.

The proposals are controversial, however, with some questioning their constitutionality. At the moment the law would still see Italians voting for candidates in blocked lists, a system many, particularly MPs in the M5S, criticise as anti-democratic. That – among several other issues – will resurface in the senate.

Implementing a new voting system that prevents the reoccurrence of last year's damaging post-electoral deadlock has been a priority for Renzi since before he wrested power from Letta.

Thanks to an election that left the centre-left bloc with a majority in one house but not in the other, Italy was left without a government for over two months. And when that government came, it was not destined to govern easily: the unwieldy big tent of centre-left, centre and centre-right was for months hamstrung by the legal affairs of Berlusconi, convicted last August of tax fraud.

As it stands, however, the law applies only to the lower house. That is a considerable obstacle, given that it was the upper house that posed the real challenge in terms of governability. It is, wrote the constitutional lawyer Michele Ainis in the Corriere della Sera on Wednesday, a "half-reform".

"A half-reform is not yet a reform," he warned, "especially not if this other half depends on the senate, the lions' den."

Renzi's answer to this conundrum is that there should be no senate, at least not in the form in which it now exists. He wants to ditch Italy's inefficient system of "perfect bicameralism", in which both houses of parliament have equal powers over the legislative process. Instead, the senate would be a chamber made up of local representatives with no power to pass or block legislation.

Although a concrete proposal is yet to come, it is expected to propose cutting the number of senators from more than 300 to around 160 – which brings the potential for protracted, incendiary debate.

Asked in an interview on the state broadcaster Rai on Sunday how he could be so sure current senators would effectively vote for their own dismissal, Renzi replied: "Because they are showing themselves to be people who are in line with the country; because they are showing themselves to be people who care more about Italy than they do about themselves.

"In politics there are also serious people, you know. We know that 1,000 politicians [the total number of MPs across both houses] is too much."