ROME--Italy's government on Friday approved the country's first sweeping income tax cuts in more than a decade, giving up to EUR80 a month in extra cash to three-quarters of the workforce.

The cuts are worth EUR10 billion over a year, and will go into effect next month. Prime Minister Matteo Renzi has said the move is aimed at voters going to the polls for the European parliamentary elections. It is also meant to boost domestic demand and ease Italy's dependence on export-led growth, at a time when foreign demand is showing signs of slowing.

Mr. Renzi, whose Democratic Party is currently enjoying a record high in opinion polls, is making a high-stakes bet with the move, as his administration hasn't identified all the budgetary savings required to fund the tax cuts on a permanent basis.

"These aren't one-off tax cuts, they're structural," Mr. Renzi said.

He outlined EUR6.9 billion in targeted measures that would help lessen the impact on the state. Among those measures are a maximum salary cap of EUR240,000 salary cap for public servants and EUR2 billion in savings on purchases by the government.

The government will also oblige local administrations to cut their outlays and make all their expenditures public or face reduced transfers from the central government. Italy's press has identified a number of cases where local politicians used public money to purchase items ranging from caviar to underwear.

But Mr. Renzi's plan also relies on funding from a windfall levy on capital gains for commercial banks in exchange for allowing them to value their shares in the Bank of Italy at a higher level.

The income tax cuts will result inasmuch as EUR1,000 more in annual take-home pay for salaries of up to EUR28,000 a year. Italian employees face typical tax rates of 50% and higher when the country's stiff payroll contributions are included.

Focusing all the tax cuts at the medium and lower end of the wage spectrum should boost consumption, which the Bank of Italy said earlier Friday remains 7% below its level in 2007.

The last major tax cuts were in late 2000, when a center-left government on the eve of elections--won by conservative tycoon Silvio Berlusconi--approved the equivalent of EUR30 billion in tax reductions.

At the time, however, Italy's economy was growing at a 3.7% annual rate, the budget deficit was 0.9% of gross domestic product, and the public debt was 109% of GDP. Today, Italy's economy has just begun a modest recovery after a five-year crisis that has knocked GDP down by 9% and pushed the debt level up to 133% of GDP.

While economists agree that channeling resources to people most likely to spend it will maximize the economic impact, many say that a more effective intervention would have been to cut a business tax levied on payrolls, as that would lower Italy's labor costs and bolster employment prospects in the medium term.

The government is lowering business taxes modestly this year but has vowed to focus on that in 2015.

The euro area's fiscal rules make it harder for Rome to achieve that goal without further spending cuts, which could themselves have adverse economic effects. Earlier this week Economy Minister Pier Carlo Padoan sent a letter to the European Commission explaining Italy intends to have a looser fiscal policy than the rules formally require.

He said Italy's economy faced "exceptional circumstances" due to a financial crisis that was born elsewhere and ultimately led to a domestic credit crunch as northern euro-zone banks transferred to the European Central Bank their exposure to the financially stressed euro-zone countries. Italy's economic output, measured in GDP per capita, has retracted even more than the output in Greece, and has regressed to its level in 1997, according to the International Monetary Fund.

Mr. Padoan accused Brussels of using too harsh a calculus in assuming how much economic potential Italy has lost and noted the government is planning other measures to simplify business activity.

The new tax cuts and other measures should have a positive structural effect and "put the Italian economy on its fastest growth path in 20 years," he said Friday.

Write to Christopher Emsden at chris.emsden@wsj.com

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