Unionists need to know republicans are serious about their commitments to exclusively lawful means, the Northern Ireland secretary has said.
Mr Hain has pressed the political parties for movement on devolution
Peter Hain also insisted nationalists needed to know unionists were serious about the commitments to share power on a genuinely equitable basis.
He challenged both sides to put direct rule ministers "out of work in 2006".
NI's power-sharing executive collapsed in October 2002 following the arrests of three men over "Stormontgate".
Mr Hain said it was essential there was real political movement in 2006 "if the assembly elections due to be held in 2007 are to have any meaning".
Every year that passed without devolution increased the "democratic deficit" for the people of Northern Ireland, he said.
"Big decisions had to be taken in 2005 on education, infrastructure, health and public administration.
"Those decisions had to be taken by direct rule ministers working in the best interests of Northern Ireland and its people.
"There will be more big decisions to be taken in the future, not least on policing and criminal justice, and those decisions should be taken by politicians elected by those who will be most directly affected by those decisions. That is the point of devolution."
On the issues of "unequivocal support for policing and genuine political engagement", inertia was not in anyone's interest, said the secretary of state.
Deputy DUP leader Peter Robinson said the government was wrong to expect that unionists were "so impressed with the IRA moves" that they would have welcomed Sinn Fein into government.
Mr Robinson said the Northern Bank robbery, the murder of Robert McCartney and the "unravelling of the Stormont spy ring scandal" meant there was "less trust at the end of 2005 than there had been at the beginning of the year".
"... Local politicians must calculate whether they mark time, hoping that somewhere in the distant future we will find the circumstances needed to propel us to that level of belief and conviction in which executive devolution can survive and flourish, or whether we should attempt to get devolution off the ground by establishing a non-executive form of devolution... ," he said.
Sinn Fein general secretary Mitchel McLaughlin said Mr Hain knew that "the real problem is the refusal of unionists to share power on the basis of equality".
"It is this reluctance that the British secretary of state needs to tackle head on," he said.
"The British government could, and Sinn Fein have argued should, lift their unilateral suspension of the institutions tomorrow. This would put immediate pressure on unionists to engage."
Ulster Unionist leader Sir Reg Empey said rebuilding confidence in the political process "could mean a great potential for change".
"People have to be given an encouraging signal - one that spells out that ordinary law abiding citizens will have their voice heard for a change," he said in his new year message.
"Government needs to shift their focus away from placating the bank robbers and hoods who are regularly given headlines and political leeway.
"Unionists will be looking to see if the government is going to respond positively and stop the republican concession train and rebuild unionist confidence in politics. All of us must play our part in this."
Sean Farren, SDLP senior negotiator, said the two governments "must press ahead to restore the institutions of the Good Friday Agreement".
"We need to get ourselves on a countdown for restoration. 2006 must be the year when the bluff of those who are blocking progress is called and the DUP's stalling tactics are overcome," he said.
"There is an onus on both governments to kickstart this whole process again and put real pressure on the problem parties to co-operate and finally fulfil their commitments written into the Good Friday Agreement."