BRASILIA (Reuters) -Brazil's government is expected to back a bill proposing a 10% cut to federal tax breaks, two sources told Reuters on Thursday, in a move that could allow it to scrap a controversial increase in the tax on financial transactions (IOF) proposed last month.

The bill, which was proposed by lower house lawmaker Mauro Benevides, sets a 5% reduction in the value of tax benefits in 2025 and a further 5% cut in 2026, the proposal showed. The legislation also applies to fiscal and credit benefits.

The measures would allow the government to increase revenue by 40 billion reais ($7.16 billion) this year and another 40 billion reais next year, one of the sources said.

The compromise follows an intense backlash over a government decree that raised the transaction tax on a range of credit, foreign exchange and private pension operations to increase revenues, prompting lawmakers to mobilize to overturn it.

The proposal to reduce tax breaks, however, will not include the Manaus free trade zone and non-profit entities, the bill showed.

It would also block the concessions or the renewing of tax, credit and fiscal federal benefits.

Brazilian Finance Minister Fernando Haddad said earlier this week that the government would unveil a new set of fiscal measures next week aimed at balancing public accounts, with their approval seen as crucial to revisiting a controversial IOF tax hike.

($1 = 5.5845 reais)