The Irish government is facing growing calls to abandon the centrepiece of its economic recovery plan after large-scale public protests at the weekend organised by the main trade unions.

A controversial proposal to impose a levy on the pensions of public servants – effectively a pay cut for the 350,000 state employees from ministers to local authority workers – drew 100,000 ordinary people on to the Dublin streets on Saturday in a protest organised by the Irish Congress of Trade Unions.

The levy is the centrepiece of an economic stabilisation programme announced last month aimed at curbing a ballooning budget deficit which, even with the proposed savings, is set to reach 9.5 per cent of gross domestic product this year. This is more than three times the fiscal benchmark set by the European Union.

Brian Cowen, the prime minister, said ahead of Saturday’s demonstrations it was “essential we show a credible start on the correction of an emerging unsustainability in our public finances”.

He said the government is “not in a position to continue to meet the public service pay bill in the circumstances of declining revenue”.

He warned that policy inaction would “impact directly and severely on our international reputation among investors and, in particular, on our capacity to raise funds and on the direct cost of servicing the borrowing”.

Ireland’s economic downturn, triggered by a slump in construction and house sales, has blown a hole in government tax revenues. It is now spreading to the real economy, with unemployment forecast to rise from 326,000 in January to 500,000 by the end of the year, according to Turlough O’Sullivan, chief executive of the Irish Business and Employers Confederation.

The fear of job losses is compounded by public anger at the perceived mishandling of the banking crisis and the scandals surrounding Anglo Irish, the specialist property lender nationalised last month.

The anger is exacerbated by the realisation that the €7bn ($9bn, £6bn) that the government plans to inject to recapitalise Allied Irish Banks and Bank of Ireland is being provided by the National Pensions Reserve Fund, a sovereign wealth fund originally set up to pre-finance the pensions bill of public servants retiring after 2025.

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