That dreaded word "recession" may yet get an airing over the coming months, following surprisingly poor Exchequer returns to the end of August.

The slowdown has taken most analysts and certainly the Department of Finance by surprise and the search is on for a clear explanation of what exactly is happening.

What is certain is that the Exchequer surplus will be substantially lower than previously imagined. The Department of Finance is now "speculating" that the surplus will be £750 million below its target at the beginning of the year. In June it estimated that the surplus would be £500 million below its target. However, sources close to the Department say it is likely that the eventual outcome will be £1 billion below the initial target. Most analysts and commentators are now making similar predictions.

With spending running at 24 per cent more than last year, the situation is simply unsustainable. The forthcoming Estimates process in November and the Budget in December will not present the kind of opportunities the Coalition would have wished for, prior to a General Election. Indeed, Mr McCreevy, - with the benefit of hindsight - would probably have been better postponing last year's tax cuts and general giveaway Budget until this year.

Nevertheless, the message now that there is not as much money to give away is a good one from Mr McCreevy's viewpoint. The Cabinet meeting yesterday discussed the estimates briefly. Mr McCreevy is pushing strongly the line that spending increases by all Government Departments can no longer be randomly granted and that the results of all spending must be obvious. As one observer said, there will be difficult choices to make and all spending must be looked at differently with value for money and quality as the main determinants.

The Minister will also be hoping to deliver tax cuts particularly those aimed at the lower paid, such as taking those on the minimum wage out of the tax net, a move which is also PD policy.

In addition, the slowdown could be used to allow the Government to opt out of cutting the top tax rate. The commitment to reduce the top rate to 40 per cent is conditional on economic circumstances permitting. "They clearly no longer permit," one close observer noted yesterday. However, it is not yet clear that the Tanaiste will be willing to allow an area of tax policy so clearly identified with the PDs to lapse so easily.

The Minister also believes he may have an easier run from Brussels. In the past the Commission and other states have complained about possible overheating but if the economy is clearly slowing or even not growing then there can be no complaints about a further stimulus or in other words pre-election tax cuts. This may be an optimistic notion as the Commission is likely to take a cyclically adjusted surplus figure into account and as result may echo the ESRI in calling for neutral Budget.

IBEC also warned yesterday that it will continue to press for a significant reduction in employers' PRSI while Senator Joe O'Toole, President of the Irish Congress of Trade Unions (ICTU) maintained his demands for pay cuts for the low paid, money to be spent on services and pay increases under benchmarking.

But can the Minister afford still to do all this? The answer to that is: it depends. The bottom line is that will constrain the Minister is what the Government decides is prudent to target as a surplus. And it will be a surplus.

The Government is committed to not returning to a so-called deficit financing in the run up to an election. The higher the target the correspondingly less room for manoeuvre.

It has probably made a mistake already by not shifting the focus to the EU measures for General Government Surplus. This contains the social insurance fund as well the pension fund and is thus likely to be in surplus even when the Exchequer finances are in deficit.

But just as big a problem may be the economy's growth rates and the likely knock-on effect on confidence and possibly voting intentions. There is a possibility that a recession will come more into focus over the coming months.

The problem with knowing for certain, as Mr Jim O'Leary, chief economist at Davy Stockbrokers, points out is the quality of Irish data. But he suggests that if there was US-style seasonally adjusted quarterly output data it would become apparent activity at the moment is flat and will fall in the last three months of the year. If that is true and it continues into the first three months of 2002 then it would amount to the technical definition of a recession.

The economy could now be heading for a period of far slower growth than we have become accustomed to.