Around €1bn of cuts from the social welfare budget and another €1bn of cuts to the public sector pay and pensions bill are being considered as preparations for the December budget begin in earnest this week.

Average pay reductions of 5% are possible for the public sector while a 2-3% cut in social-welfare rates would save between €340m and €510m. This could be justified by recent sharp falls in prices.

Significant cuts in child benefit of up to €500m are also inevitable, whether by taxing, means testing or a straight cut in payment. Final decisions will be made in the next two months.

Senior government figures privately signalled this weekend that an across-the-board cut in social-welfare rates and reductions in public-sector pay “can’t be avoided”.

The 15 government departments are due to submit their responses in the coming days to a request from the Department of Finance for a detailed list of cutbacks following the report of An Bord Snip Nua.

However, some government ministers have signalled their unhappiness with some of the report’s proposals. Speaking yesterday at the government’s economic forum in Farmleigh, Minister for Arts, Sports and Tourism Martin Cullen attacked the proposals to have his department shelved, saying he “fundamentally disagreed” with the proposals in the report.

With finance minister Brian Lenihan explicitly ruling out tax increases – other than carbon taxes – virtually all of the €3bn-plus required savings will now have to come from cutbacks.

Almost three-quarters of government spending goes on welfare and public-sector payments and high-level sources concede that, while there had been “no definitive discussions” on what will be done, the government is “moving in the direction” of cuts in both areas. “Otherwise,” said one senior figure, “we won’t meet our targets”.

A report soon to be published on pay rates for politicians, judges and top civil servants is certain to recommend pay cuts for higher earners and this is expected to be the catalyst for cuts in pay across the public service.

Senior union sources, while publicly warning they will resist any cuts in pay or pensions, are bracing themselves behind the scenes for that eventuality. At a series of private meetings between the Department of Finance and public sector union leaders last week, the full extent of the crisis in the public finances was spelled out. It was explained to the unions this “wasn’t a case of an employer that won’t pay, but one that simply can’t pay”, said one person present.

Union leaders point to a recent Ibec study showing only a small number of private sector companies have introduced wage cuts – the majority freezing rates instead.

A recent CSO study show­ed considerably higher pay rates in the public sector and the view in government is if there is a cut in social-welfare rates, politically and morally further reductions in public sector pay must follow.

One union leader said while they were “willing to sit down with the government to discuss the budgetary crisis, any cuts in pay or pensions will produce conflict”.

The prospect of cuts in welfare and public sector pay rates is causing unease within top levels of the government.

“The way it’s shaping up we won’t have one friend left,” bemoaned a senior source.