“It’s €20bn in 2012 and €25.5bn in 2013,” Prime Minister Silvio Berlusconi told reporters after the government meeting.
He said the measures were in line with demands from the European Central Bank in return for massive support given to Italy’s bond markets this week.
“This programme goes in the direction of what the ECB recommended,” the premier said.
The 74-year-old centre-right leader said the plan included a 5% tax for two years on people with an income of between €90,000 and €150,000 a year, and 10% on those earning more than €150,000.
“My heart is bleeding,” Berlusconi said, as the tax went against his election promise “never to put my hand into the pockets of Italians”.
But he said the measures were “inevitable” and the situation “dramatic”.
“After concentrating on Greece, speculation was moving towards Italy,” he said, referring to panic sell-offs seen on Italian financial markets last week.
Finance Minister Giulio Tremonti said the measures would reduce the budget deficit to 1.4% of output by 2012, and to 0% by 2013.
“We do not have any alternative,” Tremonti said when asked whether the measures would impact on Italy’s already weak growth.
The package now has to go before parliament for final approval.
A stock rally cleared the air before the government meeting, with the benchmark FTSE Mib index in Milan ending the day up 4.0%.
The new austerity measures aim to help assuage jittery markets by returning Italy to a balanced budget in 2013 instead of 2014 as previously planned.
They come on top of a €48bn package agreed in July when Rome first came under overwhelming pressure from investors.
Economists welcomed the measures but cautioned on their effect on growth.