The payroll in all government departments is to be slashed by 3% percent by the end of next year, with the exception of the health and education departments.

In a joint statement at government buildings, Finance Minister Brian Lenihan and Taoiseach Brian Cowen said the cutbacks were designed to minimise impact on the health, education and social welfare sectors. However, targets for reducing surplus staff in the HSE are to be drawn up in the coming weeks.

As well as the 3% reduction in payroll costs in government departments, Brian Lenihan said that pay increases for all government ministers and senior public servants wouldn't now be implemented until at least 2010.

The decentralisation programme is to be put on hold, and there will also be a review of expenditures at the tribunals of inquiry.

Brian Lenihan ruled out cuts in public transport projects, but warned of a tough December budget.