The Italian government announced today a $1.7 billion tax package that is designed to lower the cost of labor and help contain inflation.

New manufacturing taxes on petroleum products other than gasoline, along with higher value-added taxes on other manufactures, will be used to cover a portion of the social security contributions that are now borne by the ailing industrial sector.

By lowering plant's labor costs this way, the tax package should free funds for investiment and increase the ability of Italian goods to compete on international markets.

The decisions by the minority Christian Democratic Cabinet are an attempt to meet conditions placed by the International Monetary Fund and the European Economic Community on credit lines and loans needed to shore up the economy.

Inflation has been running 25 per cent annually for several years and a massive deficit in the balance of payments has repeatedly imperiled the lira's standing.

Last fall the Italian government raised taxes and bank rates and put a suurcharge on foreign currency transactions to curb these problems. But the IMF made clear in meetins when Premier Giulio Andreotti visited Washington in December that a sharp cut in production costs and public expenditures was essential.

The unions, backed by the powerful Communist Party, agree that labor costs must be brought in line with other countries; but have refused to modify the current system of automatic wage increases tied to inflation rates.

A 9 per cent boost is said to be due just for this month, equal to the projected advance in West German labor costs for the entire year.

A breakthrough agreement last week between the unions and Italy's National Manufacturers' Association provides that the inflation escalators will apply only to basic pay, not to seniority, bonus or retirement payments.

Despite other provisions to raise productivity, however, experts say this would not lower labor costs enough to clear the way for the sought-after $1 billion in funds from the IMF and the EEC.

According to Labor Minister Tina Anselmi, today's measures will reduce labor costs for this year by another 5 per cent. Other moves this week will provide savings by fixing a maximum highway speed of 80 m.p.h. and abolishing thousands of free railway passes.

Criminal actions are to be taken against those who receive unemployment benefits while working at second jobs.