Northern Ireland’s political parties have reached a breakthrough in talks aimed at saving the power-sharing executive in Belfast and dealing with controversies hanging over from the peace process.

The five unionist and nationalist parties have agreed on a position paper on welfare reform that includes a £2bn cushion to protect the region against possible job losses in the public sector.

David Cameron told the devolved government at Stormont that he would allow it to set its own corporation tax – one of the few policies that all the Northern Irish parties agree on – if it could reach a deal on reforming the welfare system.

The £2bn package the parties are jointly proposing would be rolled out over 10 years to protect the local economy from a shrinking public sector.

Theresa Villiers, the Northern Ireland secretary, said the UK government would take “very seriously” the position paper advanced by the Democratic Unionists, Sinn Féin, the Ulster Unionists, the Social Democratic and Labour party and the Alliance party.

“There does seem to have been a degree of progress between the parties. Our response is going to have to take into account the deficit that we inherited and the limited resources we have,” Villiers said.

However, she said Cameron would not be back in Northern Ireland before Christmas.

Ireland’s foreign affairs minister, Charlie Flanagan, who is co-chairing the talks with Villiers, said: “Substantial progress has been made in negotiations over the past 24 hours. Intensive engagement continues. We remain firmly of the view that a successful and comprehensive outcome to this process will be in the best interests of the people of this island and are working to that end.”

The power-sharing executive in Belfast, which relies exclusively on financial support from the UK Treasury, faces £200m cuts to its budget this year unless changes imposed from Westminster to reduce the local welfare and benefits bill are accepted at Stormont.

There was no clear sign on Friday evening of whether the parties had reached a more comprehensive settlement encompassing other issues such as loyalist marches, restrictions on flying the union jack at Belfast City Hall, and how to deal with the violent legacy of the Troubles.

Banned marches such as an Orange Order parade in north Belfast and latterly Belfast’s city council’s decision to end its policy of flying the union flag 365 days a year have produced violent disorder and deepened sectarian division in the community.

It is understood that the parties have agreed on one key element of the discussions – the creation of an independent body investigating Northern Ireland’s recent armed conflict. The parties want a multimillion-pound institution that among other things would examine thousands of unsolved crimes from the Troubles.