The programme will see 57 public entities, such as overlapping weather agencies and competition watchdogs, shut down or merged, Deputy Prime Minister Soraya Saenz de Santamaria said.
"Once this reform is fully implemented, it will save the public administration around €6.5 billion," she said at a news conference after a weekly cabinet meeting.
"The goal is to have a much more efficient public administration," she added.
The planned overhaul also calls for the unification of cleaning, telephone and power services and the greater use of the digitalization of public administration processes instead of in-person paper processes.
It is based on a 2,000-page report by a commission that suggested 217 efficiency measures.
The government aims to instill a new "philosophy of cooperation" among the central administration and Spain's 17 powerful regional governments, which are responsible for healthcare and education, and municipalities with the reform, the deputy prime minister said.
Total savings from reforms to the public administration made by the government since it came to power at the end of 2011, including cuts in civil servant jobs, will reach just under €38 billion, she added.
The European Union, which in June 2012 granted Spain a rescue loan of up to €100 billion to prop up banks that have been swamped in bad loans since a decade-long property bubble imploded in 2008, has pushed Madrid to reform its public sector.
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The Spanish economy, the eurozone's fourth-largest, fell into a double-dip recession in 2011 and the unemployment rate has since soared to more than 27 percent.
The International Monetary Fund warned on Wednesday that though Spain's biting recession may end soon but the outlook is tough and Madrid must do more to battle the country's unacceptably high unemployment rate.
Spain's efforts to pare its budget deficits — it is in the midst of a three-year effort to save €150 billion ($200 billion) by 2014 — must seek to avoid hurting growth, it added.