All ministries will have their spending slashed by just under 17 percent as part of total saving of 27 billion euros.
The tough austerity measures were demanded by Brussels to get Madrid's deficit down to manageable levels.
Deputy prime minister Soraya Sáenz de Santamaría said: "The government is trying to put in place all the measures necessary to change the situation, to end Spain's complicated public deficit and unemployment situation, so that we can return to growth and create jobs."
"This government will not raise value added tax but is calling for an extra effort within corporate taxes," she added.
Civil servants' salaries will also be frozen this year and electricity prices will rise by seven percent.
The cuts were announced one day after an anti-austerity general strike paralysed Spain.
Prime Minister Mariano Rajoy has said he will reduce the budget deficit to 5.3 percent of gross domestic product this year from 8.5 percent of GDP last year.