Commodities such as oil and electricity, which comprise 50% of public spending, equal to $15 billion, will be included, the interim planning minister has said.
Unveiling a three-year economic plan, compiled in cooperation with the World Bank and the International Monetary Fund, Mahdi al-Hafidh pledged "a progressive programme to suppress subsidies [which] constitute a significant burden on public finances".
Most Iraqis relied on subsidised fuel, electricity and food rations under a United Nations-sponsored oil-for-food programme during the rule of Saddam Hussein.
After Saddam's overthrow, the interim government adopted the system which still provides a lifeline for a large portion of the population, many of whom are unemployed or earn only a meagre wage.
Seeking to soften the blow, the minister promised that the government would cancel subsidies slowly to ensure a minimal impact.
"They will progressively be reduced over the coming years," al-Hafidh said.
Direct and indirect oil subsidies cost Iraq $8 billion - $2.4 billion of which is spent on imports to satisfy the local market, according to ministry figures.
The price of a barrel of oil sold to local refineries is 300 dinars ($0.2) and some 550,000 barrels are sent to the refineries daily to satisfy domestic need.
Fuel is sold at less than $0.025
per litre at petrol stations
At petrol stations, fuel is sold at between $0.01 and $0.025 per litre - underscoring the huge expense shouldered by the government.
Oil in the financial year 2005 is expected to comprise 93% of the country's revenue, at some $18.1 billion.
Iraq is predicted to generate revenues of $19.4 billion which, coupled with external aid, will bring total revenues to $23.7 billion.
But the budget is seen at $30.4 billion, meaning a deficit of some $6.7 billion, including foreign help, and $11 million without.
'Iraqi companies are starting to participate, to take sub-contracts from foreign companies'
interim Iraqi planning minister
The 2005 budget is based on a price of oil of $26 per barrel - a hugely conservative estimate, considering the price of oil ended the week at a record $55.50 a barrel.
"We have put very conservative figures on oil prices and if it
continues to rise we might be able to cover the deficit," said
Turning to the impact of insecurity on reconstruction efforts in Iraq, al-Hafidh said his request that more local companies are involved in the contracts - which had typically been handed out to US and British firms - was well received by the international community at a donor conference last week in Tokyo.
"Iraqi companies are starting to participate, to take sub-contracts from foreign companies," he added.
After the two-day gathering in the Japanese capital that ended on Thursday, a joint statement by the 57 countries and institutions vowed faster aid to Iraq. Much of the pledged assistance has been held up because of widespread violence.