The 9% GDP contraction is a downward revision from a target of -8% set in April, while the 10.8% deficit now expected is a reduction from a goal of 11.9% set just last month.
The new targets were agreed at a meeting of the ruling parties on Tuesday, the Treasury said in a statement, and will be formalised in the government's Economic and Financial Document (DEF) to be approved by the cabinet this week.
The DEF will be sent to the European Commission for approval and form the framework for Rome's 2021 budget to be presented next month.
The coalition, led by the anti-establishment 5-Star Movement and the centre-left Democratic Party (PD), has been adjusting its economic and public finance targets since Italy was struck hard by the coronavirus pandemic in late February.
The DEF will target growth to rebound to a positive 6.0% next year, when the budget deficit will decline to 7.0% of GDP, the Treasury said.
The 7% deficit next year is a hike compared with a 5.7% target set in April, reflecting extra spending pencilled in by the government to help shake off its steepest recession since World War Two.
Expansionary measures in 2021, financed by extra borrowing and money from the EU's Recovery Fund to help countries hardest-hit by COVID-19, will total some 40 billion euros ($47 billion), Economy Minister Roberto Gualtieri said in a televised interview on Tuesday.
Italy's public debt, proportionally the highest in the euro zone after Greece's, will be targeted at 158.0% of GDP this year, up marginally from 157.6% forecast in August and the highest ratio in the country's post-war history.
The debt-to-GDP ratio will decline in 2021 and subsequent years, the Treasury said, without providing numbers.
The budget deficit is targeted to decline to 4.7% of GDP in 2022 and fall to 3% in 2023 - the ceiling set by the EU's Stability Pact, which has been temporarily suspended to allow countries to hike spending to deal with the coronavirus crisis.
(Reporting by Giuseppe Fonte and Gavin Jones, Editing by Rosalba O'Brien)
By Giuseppe Fonte and Gavin Jones