(Writes through with union, more PM comments, sentiment data)
By Andras Gergely
DUBLIN, Jan 28 (Reuters) - Ireland's government and unions said on Wednesday they had crept closer to a deal to cut spending that Dublin hopes can help it stave off a credit rating downgrade amid evidence its economy continues to weaken.
Standard & Poor's warned this month it may cut Ireland's AAA sovereign debt rating due to buckling public finances. It has already cut the ratings of fellow euro zone members Greece, Spain and Portugal after similar warnings.
The government has drafted a framework agreement with social partners including 2 billion euros ($2.65 billion) of fiscal adjustment this year. It aims to develop that into a final deal before signing off on government plans next week, Prime Minister Brian Cowen said.
"I hope that it will be possible to conclude a pact with the social partners based on this shared understanding of the problem and the best way forward," Cowen told a parliamentary debate on the economy.
"In any event, the government will simply have to take the decisions necessary to achieve our objective of stabilising the public finances," he said.
The Irish Congress of Trade Unions said it had accepted the government's proposed framework for the talks, including the need to cut spending by 2 billion, but it was waiting for concrete ideas on how to achieve that.
"We have not seen any firm proposals on how they propose to go forward," an ICTU spokesman said. "The way is now cleared for that to happen," he said, adding that a detailed pact could be agreed by Friday or the weekend.
The government does not need union consent for budget reform. However, it is predicting 100,000 job losses over two years and wants to minimise social tension evident in countries such as Spain that have experienced a quick reversal of fortune.
WORSENING SENTIMENT
Cowen repeated warnings that the budget deficit could reach between 11 and 12 percent of gross domestic product for each year up to 2013 without corrective measures, compared with the 3 percent allowed by European Union rules.
He said the Irish economy shrank by almost 2 percent last year, when Ireland became the first euro zone member to enter recession, causing an 8 billion euro shortfall in tax revenues.
That marked an abrupt reversal from 6 percent economic growth in 2007, the last year of Ireland's 'Celtic Tiger' boom.
"This is likely to represent the beginning of an adjustment that will see a reduction of up to 10 percent in national income over the 2008-10 period, a scale of decline that is without precedent in Ireland and with few international parallels," Cowen said.
A separate survey on Wednesday showed Irish consumer sentiment weakened last month as fears over personal spending power and the deepening recession took their toll. The KBC Ireland/ESRI Consumer Sentiment Index slipped to 49.6 in January from 50.2 the previous month. The index, which hit an all-time low of 39.6 in July 2008, was 67.0 in January 2008.
To respond to the deepening recession and the prospect of deflation, employers have proposed deferring a pay deal agreed in September that offered workers a 6 percent pay rise over 21 months, but unions have rejected the proposal.
(Additional reporting by Jonathan Saul)