Up to 60,000 public-sector workers could lose their jobs under proposals to slash government spending in Scotland.
An independent review of the budget commissioned by Scottish ministers concluded that cutting the public-sector pay bill would have the biggest impact.
It will be £15.2billion this year – 59% of the Scottish Government’s resource budget.
The review panel, which drew up the budget options, recommended staff numbers should fall by 5.7% to 10% by 2014-15, through natural wastage as far as possible.
With more than 600,000 staff in the public sector – nearly one in four of all Scottish jobs – any cuts would have a major impact on the economy.
The report also suggested a two-year pay freeze and an immediate recruitment freeze.
The panel was put together in February to look at what cuts could be made in the face of a £42billion squeeze over the next 16 years.
It suggested an immediate review of all free universal services such as personal care, concessionary travel and eye tests. It also said the government should consider suspending the final stage of free prescription charges
The council tax freeze should be abandoned because it did not appear sustainable in the projected economic climate.
The government should also look at following the example of England and introducing university tuition fees, which have been scrapped in Scotland.
The so-called three wise men – chairman Crawford Beveridge, Robert Wilson, and Neil McIntosh – who drew up the report, stressed they had no preferred solutions, but merely put forward a series of options for politicians to consider.
Mr Beveridge said: “There are very difficult decisions to be made over the next few months, requiring strong leadership not just in their making but also in their subsequent implementation.
“Clearly there are significant short-term challenges. However, important decisions need to be taken about the future. Scotland needs to decide what form and shape of public services it desires and can afford.”
The capital budget for building projects like schools, hospitals and roads is projected to fall by £900million, or 28%, between this financial year and 2014-15.
The panel urged the government to “take every possible step” to prioritise and fund capital expenditure because it can drive forward productivity and provide jobs.
When making decisions ministers should take into account the implications of major national projects like the new Forth crossing when deciding what should go ahead.
The option of turning Scottish Water into a public interest company should be explored because it would release millions of pounds for building projects, according to the review.
Last night the Scottish Government insisted that the Aberdeen bypass project would not be sacrificed to save money.
A spokeswoman said: “Ministers are totally committed to delivering the Aberdeen Western Peripheral Route and to the project being completed as soon as possible.”
Finance Secretary John Swinney called for cross-party talks to discuss the way forward but stressed there were certain areas that were off-limits.
“There are many options but clearly there is no need to pursue all of these as they would generate far more savings than is actually required,” he said.
“The government has made clear our determination to protect the vulnerable, which is why, for example, we will preserve existing eligibility for free personal care and concessionary travel.”
Scottish Water would remain in public hands, Mr Swinney said.