Speaking on RTÉ Radio's This Week, Brian Cowen said the Government would now have to discuss the situation with the social partners and then take decisive action over the coming years to address the problems in the public finances.
He said that without corrective action, the Exchequer deficit in 2010 could rise to €20bn.
Mr Cowen signalled that the national wage agreement could be under threat, saying all options would be on the table during upcoming talks with the social partners, including the pay deal.
He said that what was now needed was for everyone to pull together and agree on an overall programme to stabilise the public finances.
Ireland is facing a very difficult year, he said, and next year could also be very difficult.
The challenges we face are unprecedented, Mr Cowen claimed, but added that we have to face into and address them.
But he said that without underestimating the problems we have to keep things in perspective and that we are entering this recession in a stronger position than before.
Asked if the deteriorating public finances meant tax increases were likely, Mr Cowen said the Government was not looking at tax changes as an immediate priority.
But he said there was no doubt in his mind that over the next four to five years, taxation will have to play a role in getting day to day spending back in balance with tax returns.
On the possibility of lay-offs in the public sector, the Taoiseach said the Public Expenditure Review Committee is looking at all aspects of public spending and the Government will then have to make the decisions based on its recommendations.
He agreed it was unlikely that there would be any expansion in public service numbers and that there could probably be a reduction.
The present situation as it stands is not sustainable for any Government, he said, and it had to be addressed.
Treaty goes beyond party politics
On the likely re-run of the Lisbon Treaty referendum, Mr Cowen said he believed people have seen in recent months especially, the importance of Irelands membership of the EU.
As a result, he said, there is a growing realisation among everybody that Ireland's national interests are to be in the mainstream of the EU, and standing alone is not in our interests.
He said the Government was working to address the concerns highlighted by the Oireachtas committee and departmental surveys.
He described the Treaty as a huge issue which goes beyond party politics
Mr Cowen said he was not worried that Fianna Fáil might be badly hit in the local and European elections, saying the party has good quality young candidates, who will be voted on based on the local realities.
He also said no decisions had been made on when the bi-elections will take place to fill the two vacant Dáil seats.
On the question of reports that Mayo TD, Beverley Flynn, is drawing an allowance due to only to Independent TDs, even though she has rejoined Fianna Fáil, Mr Cowen said he would be taking the matter up with Deputy Flynn and whatever is appropriate to be done will be done.
