Thousands of civil servants will be transferred into the private sector under a blueprint to shake up Whitehall that will be unveiled next month.
Plans to identify central government operations that can be spun out and commercialised could affect one in six civil servants, or 75,000 staff.
It is the next step in the Government's vision to foster a "John Lewis economy" of employee-owned businesses and reduce the bloated public sector. Chancellor George Osborne is expected to talk up the progress made in Whitehall reforms in his Budget on Wednesday.
New recommendations on spin-outs are due next month in a report by Stephen Kelly, the former chief executive of software provider Micro Focus. It is expected to say that there are numerous government operations that could be potentially commercialised, either through forging partnerships with outside firms or seeking capital injections.
The coalition is a fan of mutuals, claiming they are more productive than other companies, more resilient in a downturn and suffer from lower levels of absenteeism. Ministers want to lift their contribution to the UK economy from the current 2 per cent. With that in mind, Deputy Prime Minister Nick Clegg last week announced a review that could lead to tax breaks for employee-owned companies.
My Civil Service Pension (MyCSP), a Whitehall division that handles the retirement funds of 1.5 million civil servants, was selected last year as the first operation to be moved into the private sector. Ministers plan to sell a stake to a commercial partner but also hand shares to staff.
Francis Maude, the Cabinet Office minister, has led the charge to reduce central government costs, including a clampdown on the use of management consultants. But, the National Audit Office warned last week that even though Whitehall had slashed its annual wage bill by £400m by axing 17,800 staff, there was a risk staffing levels would have to be bolstered again unless working practices changed.
The Cabinet Office has recruited Ed Welsh from investment bank Rothschild to lead the work on using new business models such as mutuals.
"Introducing new models for delivering public services will increase the quality and value of services, and unlock growth, saving money for the taxpayer," Mr Maude said.