FINANCE minister Brian Lenihan is looking for fresh spending cuts of around €800m for next year, on top of the €1.3bn reduction that has already been signed off by ministers in estimates negotiations.

The grim news comes as it emerged this weekend that Ireland's property developers, who made millions in the boom, are seeking tax refunds of hundreds of millions of euro after writing down the value of their land banks and other assets. This threatens to drastically reduce the corporation tax receipts the Revenue Commissioners were banking on.

With September tax returns expected to be very bad and the economic climate rapidly deteriorating, a further 1.5% reduction in 2009 spending is now up for debate. This would bring planned cutbacks in current expenditure for next year to more than €2bn.

"It's very grim. Two weeks after finance sought cuts across the board, they returned and told the departments that the situation had got worse and there was now a requirement for deeper cuts," one senior official said.

If a further 1.5% reduction is delivered, the overall cut in day-to-day spending for next year will be close to 4% – around 7% when inflation is factored in. The cutbacks will be discussed at today's special cabinet meeting, with informed sources saying there remains a large number of issues "to be thrashed out" in advance of budget day.

Although the government will not have key information on business tax returns for a number of weeks, it is likely to have to plan for a budget deficit in the region of 5.5% for 2009 – smashing through the EU's 3% rule.

Lenihan is said to be determined that each euro borrowed offers a long-term benefit for the economy. A potentially expensive voluntary redundancy scheme across the public service would fall into this category. The budget will include a voluntary package for HSE employees, and Lenihan could also use his speech to 'plot a course' for how this could be extended across the public sector in a highly targeted manner.

Informed sources say it is inevitable that taxes will rise in the budget. They believe tax credits and bands will not be index linked for inflation – resulting in income tax increases by stealth. Asked would new forms of taxation such as carbon taxes be examined, one senior political figure said: "Everything is on the table".

Informed sources said negotiations on spending plans were particularly difficult with the departments of health, transport and education. Agriculture and foreign affairs are the hardest hit of the government departments.

Well-placed sources said that, while there was some degree of realism across the public service, there remains some resistance and "a fair amount of empire building".

Meanwhile, hopes were high last night that agreement could be reached today between Democrats and Republicans on a $700bn government bailout to rescue Wall Street bankers.

"I'm convinced that by Sunday we will have an agreement," said Barney Frank, a key Democrat in the talks designed to stave off an economic disaster.