Last week the message could not have been any clearer: our public finances need extensive surgery. Fitch's two-notch downgrade and the superb OECD report both fired timely warning shots ahead of the pivotal budget 2010, now only five weeks away. Meanwhile, public-sector unions remained in "negotiations" and there is the suggestion public services will be slashed. This is quite deceptive. Most people do not distinguish between price and volume, because goods and services are paid for in cash. But in this case, what matters is that the volume of services provided by public servants is maintained while bringing down their cost (or price). The plan is to cut the bill to the state, by reducing inflated pay (and maybe pension) rates.

Nobody is talking about reducing the volume of services, just that we deliver the same services at a lower cost to the taxpayer. Only the unions themselves can cause the amount of services to be reduced by inciting strike action. Note that only one-third of Irish workers were unionised in 2007 (the latest data available), and half of these union members were located in the public sector. Of course, it is possible that public-sector workers could become less productive if pay is cut. But in a weak labour market that is unlikely.

Second, the spectre of a deflationary spiral has been raised by ICTU. On the face of it, the €4bn fiscal retrenchment due in the budget takes cash directly out of the economy. But suggestions it will tip the economy over the edge are fanciful. Remember that €2.5bn of the plan will centre on reducing the cost of public expenditure. It is about cutting unneeded fat that will make the economy healthier. As the cost of running the state falls, it will have a knock-on impact by reducing the cost of business for the private sector.

The distributional impact of the coming fiscal consolidation may actually lessen the initial negative impact on economic activity. Would public-spending cuts hurt the economy immediately as much as tax hikes of the same magnitude? Perhaps not. Think about who takes the hit.

We know public servants' wages on average (the gap is biggest at the lower end of the pay scale) are some 20% higher than those of their private-sector peers, adjusting for experience, job characteristics and education. Higher incomes provide a cushion. But there is another compensating factor. The age profile is older in the public sector. Intuitively, that suggests the mortgage debt burden is lower. That has two implications. It means higher relative discretionary income. It also means negative equity is less of an issue, something that has contributed to the drop in consumer spending (the savings ratio has spiked from 2% to 12%). The 25 to 34 age group is worst affected by negative equity; proportionately fewer of these work for the state.

The last suggestion is to delay the fiscal consolidation, by extending it to 2010-2017, rather than 2010-2013. That cannot be contemplated. Ireland tried that in 1982-1987 and ended up with five lost years. If we don't tackle the structural deficit the state's debt burden will build inexorably leading to a larger annual servicing cost. Not only that, but investors will demand greater compensation for holding Irish government debt: new bond issues will come to the market at higher interest rates. As a result, debt repayments will devour a greater share of revenue.

Something would have to give. If the suggestion is to try even higher tax rates, the result will be disastrous. In the immediate term, households will keep saving too much disposable income fearing taxes will rise indefinitely. But we have reached the point where lifting marginal tax rates any further will make it difficult to attract skilled labour, deter investment and push up wage demands. Equally, actual public services will eventually be cut drastically by travelling the procrastination route.

If the government bottles it and opts for delay, it is the only circumstance in which the tough decisions may ultimately be taken out of our hands (by outside agents). Even many currently protected workers would then be living on borrowed time.

Rossa White is chief economist with Davy