Irish racing has never been stronger based on on-track performances but off the track, the recession has hit racing hard, according to Brian Kavanagh, chief executive of the sport's organising body Horse Racing Ireland (HRI).

Three of the top four flat horses in the world, including Sea the Stars, were trained in Ireland. The top three were bred here. On the other hand, attendances at racecourses were down 13% last year, prize money has been slashed to 2002 levels, on-course betting has fallen by a fifth and bloodstock sales have plummeted by nearly a third. Like every state body, HRI has also had to come up with cost savings. All but essential track improvements have been put on hold, plans to redevelop the Curragh have been scaled back and HRI staff had to take pay cuts.

Even wealthy owners are cutting back on the size of their strings, resulting in stables cutting back on staff. All in all, around 1,500 jobs have been lost in the last 18 months, devastating racing's heartlands in Kildare and Tipperary. If any other industry lost that number of jobs, a government taskforce to resolve the problem would be up and running, Kavanagh says. "This recession is worse than anything anyone has experienced before. The irony is that we've probably never had a better year on the track."

Further cuts to its budget risk damaging the sport and handing an advantage to racing in Britain and France, he says. Owners and trainers will send their horses where the money is. French racing has an income of €400m, generated by the profits of the state-owned betting monopoly, the PMU.

"There is a point beyond which cuts become counterproductive. Some benefit on the flat is the breeding potential but for national hunt it is all about money. We've tried to maintain a minimum value of any race of €7,000. We've had a small cutback in the number of fixtures and we've shaved bits and pieces of prize money everywhere. But there is only so much you can do on the cost side without inflicting more damage."

Racing is a valuable industry for the country. A report last November by the Irish Thoroughbred Breeders Association estimated that the sector is worth €1.1bn to the economy and employs more than 22,000 people.

At a time when resources in the country are scarce, there's unlikely to be much sympathy for any difficulties for a sport dominated by billionaire Arabs and tax exiles. While Kavanagh says that that's a "lazy" view of those involved in racing, he wants its funding secured once and for all so that it is less of a drain on the state.

"You have to look at the industry as a whole and not a couple of individuals. As a country do we want to support an industry in which we are a world leader, which gives rise to significant exports and significant employment?"

Kavanagh has found an unlikely ally in the Labour Party. A recent policy document by Labour urges taxing all gaming revenues in Ireland, either by punters walking into betting shops or fast-growing online betting. Overall, betting revenue in Ireland is estimated at about €6bn a year, though not all of this is taxable as some bookmakers base their telephone and online operations offshore – Gibraltar and the Isle of Man being the most popular – and therefore the revenue is not taxable. Labour said a 1.5% levy on all betting revenues (up from the present 1%) would generate about €90m a year for the sport, cutting the need for any state funding.

"It echoes what we've been saying for years. Ireland has the lowest betting tax in the world and that has created a funding difficulty. A third of betting that goes on in Ireland is offshore and they pay no tax," Kavanagh says. "The ideal situation is where we are not relying on state subvention. We need a realistic level of betting tax to fund horse and greyhound racing. We are competing with special needs schools and hospitals for funding and that's not justifiable."

With the right financial incentives there should be no reason why the main bookmaking chains shouldn't choose Ireland as their offshore base, he says.

He isn't the only one looking to secure the future of the sport. In Britain, racing authorities are looking to modernise to bring in new audiences. The Racing for Change committee has recommended bringing an end to some of the sport's anachronisms. It wants to end fractional odds pricing (so 9-4 becomes 2.25-1) and a furlong will be 200 metres – to attract younger punters tempted by other sports.

While Kavanagh agrees with some of the measures, these changes alone won't bring punters back.

"Racecourses are working hard. It involves having a long hard look at the product. You can't just look at ticket prices. You have to look at the cost of food and drink and that is all before you get into a battle with bookmakers."

Getting paying customers to go racing again will take time, though Kavanagh insists that attendances at the major festivals, once corporate hospitality is excluded, has held up reasonably well. The poor weather didn't help in January but the business end of jumps season only begins now so no major meetings have been lost.

While there is no doubt that racing is facing tough times, Kavanagh is encouraged that replacement sponsors for major races have been signed up. MCR, a recruitment company, took over what was the Pierse Hurdle and Toshiba took over sponsorship of the Champion Hurdle from AIG. And so far there has been no indication that the Maktoum family are cutting their investment in racing despite the problems facing Dubai.

"The quality of horses, trainers and riders we are producing is amazing. That's what gives me faith."