Brian Cowen has announced plans to slash the Irish government’s public spending bill by €2 billion, after weeks of negotiations with union leaders collapsed.

The Taoiseach said he would introduce a pension levy on public sector workers to achieve the bulk of the spending cuts this year, in spite of failing to win approval for the measures from trade unions.

"Without stable finances, there will be no economic recovery," Mr Cowen told the Dáil.

He also said that the government would postpone previously agreed public sector pay increases, which would deliver savings of €1 billion in 2010.

The introduction of a pensions levy will save €1.4 billion this year and Dublin also plans to cut capital spending by €300 million. There will be reductions in Ireland's overseas development aid and childcare allowances.

Economists praised Cowen's tough stance. "The positives are that this is a watershed. It is the first time that the Irish public pay bill has been reduced through entitlements," Rossa White, chief economist at brokerage Davy, said.

"Unions have no real bargaining power in the face of rising unemployment, so disruption in any significant way is unlikely."

The government does not need the unions' consent to cut spending but the failure to agree a deal is a sign of cracks appearing in the long-standing social partnership deal which has underpinned Ireland's decade and a half of prosperity, labelled the Celtic Tiger.

Mr Cowen said that people with second homes would pay a tax on them for the first time – a move which will anger ordinary voters, who have been encouraged by Fianna Fail-led governments to invest in a property bubble which has finally burst.

Even with €2 billion in spending cuts, Ireland's budget deficit this year will be 9.5 per cent of GDP - more than three times the European Union's 3 per cent limit.

The budget deficit for last month was €747 million, compared with a surplus of €630 million in the same period last year – an astonishing turnaround in the country’s financial health.

With Ireland’s Triple A credit rating under scrutiny, international investors are still waiting for government proposals to shore up the local banking sector, seen as a crucial part of plans to restore faith in the Irish economy, which has been hit hard by the credit crisis and the collapse in the local property market.

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