Prime Minister Benjamin Netanyahu has persuaded his cabinet to back the Trachtenberg recommendations, which include tax relief for low earners and subsidised kindergartens for children from the age of three.
But he still has an uphill struggle to gain Knesset approval for the report, which was produced by a committee of economists set up in reaction to the summer's massive social protests.
He will also have to see off IDF reservations and a threat by the social protest movement to return to the streets.
After being humiliated when his cabinet surprised him by opposing the report last week, Mr Netanyahu was better prepared and arrived at the Sunday meeting, having made a deal with the Yisrael Beiteinu party.
Foreign Minister Avigdor Lieberman's party agreed to support him in return for increased allocations of affordable housing for discharged soldiers.
The other major coalition partner, Shas, again refused to support the recommendations, claiming they benefit the middle-class but do little for the poor. Together with the members of the opposition, they will pose a bigger challenge for the prime minister when the Knesset begins its new session in two weeks. Mr Netanyahu is far short of the majority to approve it and will have to find ways of winning over some of the smaller parties.
The annual defence budget will be cut by about £3 billion to finance it.
IDF Chief of Staff Lt Gen Benny Gantz told the cabinet: "The government will have to bear the responsibility for the damage to Israel's defence.
"This is the first time that in a period of increasing uncertainty around us, with the threats multiplying, we are cutting spending on defence."
Senior officers warned that the cuts would mean slashing military exercises by as much as 40 per cent and that the IDF would not be able to buy new anti-missile defence systems.
"At the end of the day, we obey the government's orders of course," said one senior IDF officer following the cabinet's vote.
"But this is not the end of the battle. We will explain to the Knesset the consequences of each of the cuts."
The Trachtenberg report will face fierce opposition not just in the Knesset. Leaders of the social protest movement and the Nation Students Union which brought hundreds of Israelis out on to the streets in the Summer have also announced their dissatisfaction with the government's plan, demanding a new "social-orientated" state budget for 2012.
They are planning to renew the mass protests immediately after Succot.