A $274 million order for 20 new trams will form part of a $2 billion commitment to train and tram manufacturing in the state budget.
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Premier Daniel Andrews said the funding would provide certainty and allow for a long-term plan for train and tram manufacturing in Victoria.
The funding package includes $1.3 billion for 37 new high capacity metro trains, $257 million for new V/Line rail carriages and $90 million for five new X'Trapolis trains.
The government estimates 60 per cent of its tram fleet will need to be replaced in the coming decade.
The 20 new E-Class trams will be built at the Bombardier factory in Dandenong. They are set to be completed in 2018.
In June last year Yarra Trams called for 110 new E-Class trams to be added by 2020 to prevent overcrowding on the network. But the government's commitment falls short of fulfilling the anticipated need for new trams by the end of the decade.
Mr Andrews described the $2 billion investment as the first instalment for a 10-year plan.
"This is a big order today and there's going to be even further orders in subsequent budgets."
The 10-year plan also includes an additional 80 new E-Class trams to be delivered by 2021.
Mr Andrews said Victoria was the only state that made trains and trams.
"We want to see these industries grow and employ more people," he said.
The government will also spend $21 million to extend the life of the B-Class tram fleet and $75 million to maintain and refurbish the current Comeng train fleet.
Opposition Leader Matthew Guy said the government had replicated the Coalition's policy.
"Daniel Andrews' photocopier must be pretty busy because he's been out photocopying former Coalition government policy," he said.
Mr Andrews said the government would work closely with the TAFE sector to ensure the manufacturing skills were available to complete the order. He said the funding announcement would have no bearing on public transport fares.
But Greens Transport spokeswoman Samantha Dunn said the government's promises relied on it being re-elected. And public transport users would receive "next to nothing" in Tuesday's budget, she said.
"Dangerously overloaded trams are here to stay under the Andrews government, who are offering little to boost capacity in this term of government," she said.
