FINANCE Minister Brian Lenihan set out a grim picture of the country's finances to ministers at last Thursday's cabinet meeting, warning that a minimum of €3.75bn in spending cuts would be required in the upcoming budgetary process.

Although the government is some weeks off any final decisions, sources say it is now "almost a given" that €1bn of those cuts will come in the public-sector pay and pensions bill – suggesting an average cut of 5% across the board.

Without such a reduction, the cutbacks in health and social welfare would be savage, they said.

After slightly disappointing exchequer figures for September, tax revenues are now expected to come in at €2bn lower for the year than projected at the last budget.

Although this will be slightly offset by spending coming in slightly below target, the final budget deficit for 2009 is likely to reach a staggering 12% of GDP, instead of the forecast 10.7%.

Senior figures said this worsened fiscal picture would not change the upcoming budget arithmetic. However, savings of €4bn will be needed of which €0.25bn will come from carbon taxes and the remainder from spending cuts.

The government plans to hold a second cabinet meeting each week on a Thursday which will deal solely with budgetary matters.

The frequency of such meetings is certain to increase the closer it gets to budget day, likely to be on 2 December.

One of the major issues that will be teased out over the coming weeks is whether the government will go for a cut in basic social welfare rates.

Although sharply falling prices might provide some justification for such a move, one senior government source said cutting welfare rates would be "nightmare-ish stuff". He added that, at the very least, there would be no Christmas bonus payment for social-welfare recipients again this year. Child benefit is also certain to be cut sharply – either via taxation or means testing.

One of the more shocking figures presented to ministers at the meeting was that by 2013, one fifth or 20% of tax revenue could go on simply paying the interest due on our growing national debt. Two years ago, the figure was just 4.5%.

Sources said this harsh reality clearly demonstrated that calls by union leaders for the cutbacks to be spread over a longer time period simply were not realistic and the deficit had to be brought down to manageable proportions as quickly as possible.