Italy plans to reduce tax breaks for companies and cut spending on health care, a minister was quoted as saying, thereby avoiding a politically damaging increase in sales tax next year.
The government is also moving to wrest back control of spending in key areas from the country's bloated regional administrations, sources said, widely seen as responsible for much of the waste and inefficiency that is plaguing the recession-hit economy.
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Prime Minister Mario Monti and Economy Minister Vittorio Grilli outlined measures the cabinet will take at a meeting later on Tuesday when it is due to approve its annual budget, or Stability Law.
The Law will raise 10-12 billion euros of resources next year through a mix of spending cuts and tax hikes, Grilli told trade unions and employers, according to a source present at the meeting.
Grilli said revenues raised through a tax on financial transactions to be decided at the European level would also contribute.
More than half of the proceeds will be used to avoid an increase in sales tax that has been earmarked for July, with the rest going to fund new spending, including incentives to try to boost growth, the minister said.
Monti had been desperate to avoid a hike in sales tax, which would have dragged on already falling consumer spending and delivered another hit to an economy that the government expects to contract by 2.4 percent in 2012.
The 2013 budget deficit is targeted to fall to 1.8 percent of output from a targeted 2.6 percent this year thanks to measures already adopted, with the law to be approved on Tuesday not changing the government's net fiscal position.
A big part of deficit reduction plans next year and beyond will come from efforts to overhaul the regional administrations.
That will involve reforms designed to control over energy, infrastructure, tourism and communications spending back into the hands of central government, another source said.
Italian local and regional authorities have been at the center of a spate of high-profile corruption cases in recent months. But even without the scandals, a complicated web of overlapping bodies is a recipe for waste.
The sources said the stability law will also offer details on how Italy plans to meet its goal of selling state assets worth around 15 billion euros per year for the next few years.
Data earlier on Tuesday suggested Monti will have trouble meeting this year's fiscal target.
National statistics office ISTAT said that the deficit in the first half was 5 percent of GDP, the same level as at the same point of 2011, when the full-year deficit was 3.9 percent.
(Reporting by Giuseppe Fonte, writing by Gavin Jones; Editing by John Stonestreet)