ATLANTA -- Georgia officials are taking an ax to the state budget and withholding tax cuts for homeowners as predictions for the state's budget shortfall soared to $1.6 billion on Friday.

Gov. Sonny Perdue is cutting 6 percent from funding to state government departments starting immediately and will defer employee pay raises planned for January to deal with the shortfall for the fiscal year that began July 1, spokesman Bert Brantley said.

Teachers will continue to get their pay raises on time, Brantley said. But the state will not dole out $428 million in homeowner tax cuts planned for this year, he said.

Tax collections have been plummeting in Georgia and other states as the nation's economy has soured amid high gas prices and a housing foreclosure crisis.

Perdue has carved out exceptions to the deep cuts for the state's Medicaid program, which will be cut 5 percent, and K-12 funding, which will be trimmed just 2 percent, Brantley said.

Perdue had ordered state agencies to plan for a 3.5 percent cut but now he's asking them to prepare for between 6 and 10 percent, Brantley said. That likely will mean hundreds of new jobs will be cut and state spending on new capital projects will come to a halt.

The announcement came after a meeting Friday with legislative leaders to hammer out a plan for addressing Georgia's sputtering economy.

There has been talk of a state lawmakers returning to Atlanta for a special session to address the budget gap. Brantley said the proposal unveiled late Friday does not need legislative approval. But he said the governor is willing to talk to legislative leaders about a special session if they still feel one is needed. Such a session would be costly, with a price tag of tens of thousands of dollars a day,

Perdue's plan drew early praise from some GOP allies.

"Just as many Georgia families are making sacrifices in this economy, our state must also seek out ways to stay financially healthy," Lt. Gov. Casey Cagle, a Republican, said in statement.

Democratic leaders called the budget news "devastating" but pledged to work with Republican leaders to address the economic woes.

"People are hurting right now, but we are committed to working with Republicans to get through these difficult times," House Democratic Caucus Chairman Calvin Smyre of Columbus said in statement.

Mirroring national trends, Georgians appear to be responding to the bleak economic picture by spending less.

State tax revenues are down nearly 1 percent for the fiscal year, which began July 1, Brantley said. That's after a year of lagging revenues that forced Perdue to use $600 million in reserves to make ends meets for last fiscal year. Tax collections were down 9.4 percent in June alone.