Lower tax receipts will reduce the room for manoeuvre in the Budget, the Minister for Finance has warned.

In a statement to the Dβil on the economic implications of the atrocities in the US, Mr McCreevy warned that the crisis underlined the need for a "prudent approach" to the public finances, particularly over the coming months, in order to ensure that the economy weathered global difficulties.

However, he did not give any details about the current Estimates process during which he has demanded that other Ministers substantially cut back spending plans.

The rapid decline in the Exchequer finances, revealed in figures published earlier this week, confirmed that the Irish economy was already slowing, he said. Nevertheless, the main impact of the US attacks would not be felt until 2002, he said.

"Private sector lending indicators, tax revenue and housing data have already indicated that there will be a reduced carry-over of growth from 2001 to 2002," said Mr McCreevy.

He also warned that foreign direct investment and exports would suffer but added he was confident that in the medium term Ireland could return to "acceptable levels" of economic growth.

"The attacks on September 11th will now only further reduce and delay investment from the US," the Minister said. He pointed out that foreign direct investment from the US had been one of the main driving forces behind the record growth rates of recent years. Employment in IDA-assisted firms accounts for 8.5 per cent of total employment, while the information, communications and technology sector accounts for 40 per cent of exports and 6 per cent of total employment.

Overall, the US accounts for 18 per cent of exports. "There is no doubt that our exports to the US will be affected, and if we regard tourism as an export the effect will be greater still," said Mr McCreevy.

The Minister also warned that a key risk to exports was a sharp fall in the value of the dollar and sterling against the euro. "That would impact on our competitiveness at a time when wage increases remain high," he said.

He added that the Republic must ensure that wage and cost developments generally do not add to the economy's exposure on the competitiveness front. "We need to adapt our expectations to the new economic environment," he said.

The news on inflation is better, according to Mr McCreevy. In the shorter term, weaker global demand and lower Irish growth can be expected to have a dampening effect on inflation here. He is also quite optimistic about economic growth in Europe which is likely to slow further.