THERE are 130 days to go to the budget and for each of those days the cabinet has to find an average of €23m in savings. That is the magnitude of the challenge facing the government if it is to reach the €3bn target that is now so firmly set in stone.

The budgetary process kicked off for real last Wednesday with the all-day cabinet meeting at Farmleigh. From a PR point of view, it was well managed. The media gave huge coverage to the event – much more so than if it had been held in Government Buildings – and the €3bn figure in savings has now become ingrained in the nation's consciousness. Both the main opposition parties were forced to come out and endorse that level of savings.

There was also a very deliberate message coming from the two Brians – Cowen and Lenihan. It wasn't quite as clear cut as Ronald Reagan's "Read my lips – no new taxes". They can't say that because at least some people will be paying more tax after next December. But they did make clear that the emphasis in getting to €3bn would be on cutting expenditure rather than raising tax. "There is no question of increasing tax rates," was the blunt assessment of one senior government source.

In terms of beginning the process of managing public expectations, it was a decent start. But nobody around the government is under any illusions. Saying you're going to have savings of €3bn in the round is one thing; delivering that, with all it entails in terms of the impact on services, is another. The really difficult part begins now.

Indeed it is probable that the emphasis on cuts, rather than tax increases, was as much aimed at fellow cabinet ministers as at the public. It is known that some of them got decidedly windy in the run-up to last year's budget and argued strongly for more tax increases to lessen the impact of the cuts.

Getting to €3bn this time around is a huge ask – much more so than the €4bn in cuts last year. Over €1bn of that €4bn came from cutting public sector pay, which post the Croke Park agreement is no longer an option. And this year the €3bn has to be found from a much smaller base. As was pointed out by ministers last week, this year's cuts are getting much closer to the bone.

For that reason, some measures to bring in extra tax revenue seem inevitable, despite Cowen and Lenihan's strong focus on spending cuts. The tax base is far too narrow. Five years ago, just over a third of the workforce was paying no tax, 43% paid the standard rate and 21% were on the top rate. Today, 48% of workers pay no tax at all – and the vast majority of those are net recipients from the state – while just 12% pay tax at the top rate.

That level of exemption is unparalleled anywhere in the OECD and with the state spending €20bn more than it raises every year, it is just not sustainable.

The tax net will be widened either by reducing tax credits or via the new universal social contribution, which will replace PRSI, health and income levies and which everybody will have to pay. It's quite possible we will see a combination of both.

Cuts across the board

A site valuation form of property tax is not a runner for the same reason that metered watered charges are out in the short term – it will take years to put the systems in place. But the option of some form of temporary flat-rate household charge – at a fairly modest rate of, say, €200 – cannot be ruled out.

As part of this restructuring of the tax system, the government will also examine the generous tax credits given to old age pensioners; what remains of the tax relief schemes and pension tax relief in a bid to come up with €500-€700m in extra revenue. If it gets to the higher figure, that would leave cutbacks of €2.3bn. We already know that €1bn of that will come from the capital budget, so current spending will need to come down by at least €1.3bn.

It will be impossible to get that without the bulk of the cuts coming in the three big spending departments of Social Protection, Health and Education.

The Sunday Tribune has learned that Social Protection has already brought forward proposals for savings of €150-€200m, while Education is facing cutbacks of €250-€300m.

The cut in the social welfare budget is going to be particularly difficult to achieve at a time of rising unemployment. Last year, the department endured cuts of €760m and the overall budget still went up by €700m. Government sources say a repeat of last year's across-the-board cut in social welfare rates simply cannot be ruled out, even though modest inflation is likely to return next year.

Some of the savings will come from welfare reform – for example the government is understood to be looking at the current system where social welfare is paid on a six-day week, allowing people working for three days to claim benefit for three days. Employers have complained that they have found it difficult in some cases to find workers, currently working a three-day week, to go back full-time. But any saving here is likely to be modest, initially at least.

The old age pension almost certainly won't be cut – the upset it would cause and the political fall-out from that makes it a no-go area. But none of the other social welfare payments – including child benefit – can be ruled out for cuts.

The savings of up to €300m in Education are also going to be difficult to achieve as the coalition is committed, in the revised programme for government, to maintaining existing teacher-pupil ratios. Speculation about a major hike in school transport fees may also be misplaced – it would go down very badly in rural Ireland. But, however it was done, it is understood that €300m in savings have been identified.

Bad diagnosis for Health

It will be up to ministers in the coming months to politically proof those proposals in a series of cabinet meetings. Civil servants in the past were notorious for coming up with cutbacks that were highly politically contentious, in the full knowledge that the government could not live with them. However, politicians say that in the current climate, the realities have hit home and this is no longer the case.

Probably the most contentious department in terms of cutbacks will be Health, which is pencilled in for €600m in savings. That is less than the €1bn-plus cut last year. But the impact on frontline services is likely to be far more severe, because the bulk of last year's cut came from the reduction in public sector pay rates. Around 70% of the health budget goes on pay.

There is some hope within government that the new work practices agreed in the Croke Park deal might deliver savings in the health area, but there is also extreme scepticism in other quarters as to whether this will happen in the short- or even the long-term.

With €1-€1.1bn coming from education, social protection and health, the other government departments will have to come with cutbacks of €200-€500m depending on how much the government opts to raise from broadening the tax base.

Although there was talk last week of measures to create confidence and encourage people to begin spending again, there is simply no money in the kitty for measures such as cutting VAT rates. The government is hoping that the ruling out of major tax increases and the return to modest economic growth will help encourage people to spend again. But any form of stimulus package – unlikely to have a major impact in such an open economy anyway – is just not an option.

The only 'option' is getting to €3bn and that's going to mean, in the words of one informed source, "pain across the board".