THE CABINET will today be told by Minister for Finance Brian Lenihan that the exchequer will be €20 billion in the red by the end of this year unless major cuts in public spending are forced through.
Mr Lenihan is set to tell colleagues to draw up a new list of cutbacks over coming weeks, which may include cuts of between 5 and 10 per cent in the public service pay bill through a deferral of increases due next September, redundancies, non-replacement of retiring staff and actual pay cuts.
Employers and trade union leaders will meet senior Department of the Taoiseach officials on Thursday and Friday to begin difficult talks that will decide whether the social partnership deal can be renegotiated, while other social partners will be spoken to next week.
The Government appears intent on holding back on producing its key list of demands until Taoiseach Brian Cowen has returned from a week-long trade mission to Japan that begins on Monday.
However, a number of senior trade union sources privately expressed fears to The Irish Times that Mr Lenihan will demand pay cuts of between 5 and 10 per cent from all State employees earning over €40,000.
Questioned last night, the Department of Finance sharply denied a pay cut figure had been agreed, or even that the need for a pay cut had been agreed by Ministers.
"No decisions have been made. No starting positions have been decided. The Government has not even discussed the matter," a Department of Finance spokesman told The Irish Times last night.
So far, the debate about the exchequer's next moves has been confined to Mr Cowen and Mr Lenihan. Other Ministers will have to wait until this afternoon's meeting to make their views known - a situation which appears to be irritating some of them.
A 10 per cent reduction in the State payroll would save €2 billion annually. It would require significant job losses, and pay cuts for those remaining, since lower-paid workers would be excluded from all, or part of the cuts, while revenue from lower income tax receipts would also fall.
However, Siptu leader Jack O'Connor insisted public pay cuts cannot be "a quick fix" for the country's economic ills, and he demanded higher taxes on capital.
Mr Lenihan has categorically ruled out any tax increases, or a "mini-budget", in the wake of the end-of-year exchequer figures, which show tax revenues were €8 billion short, and back to 2005 figures.