The exchequer was in deficit by €1.3 billion at the end of July, with tax revenues almost exactly matching the Department of Finance's expectations for this stage of the year.

The exchequer returns for July suggest the public finances continue to head towards a deficit for the year as a whole, although economists say the shortfall may not be as large as the Government is predicting.

A breakdown of the latest figures reveals a mixed picture for tax receipts, which stood at just over €25 billion as July closed, 6.9 per cent more than a year earlier. Weakness in the housing market led to stamp duty running €173 million behind expectations for the first seven months, with capital gains tax €109 million below forecasts.

More positive signals came from income tax, which was €109 million ahead of projections on the back of a firm labour market. The SSIA effect was apparent in Vat receipts, which were €64 million higher than projected for this stage in the year. Economists at Davy said Vat and income tax would account for 60 per cent of overall revenue this year. Spending to the end of July was also up sharply, with the Government's day-to-day expenditure and capital spending both well ahead of last year. Spending on infrastructure was up 64 per cent year-on-year at the end of July, thus offering some support to the construction sector.

The €1.3 billion deficit at the end of last month compared to a €1.2 billion surplus at the same point last year. The Government has forecast that the exchequer will be in deficit by €546 million at the end of December.

Alan McQuaid, chief economist at Bloxham Stockbrokers, said the deterioration in the exchequer so far this year should not be taken as a sign that the economy as a whole is softening.

He predicted an exchequer deficit of about €200 million for the end of the year and a general Government balance that will be one of the healthiest in the eurozone.

Ibec pointed out that both the labour market and consumer spending, two of the "fundamentals" of the economy, are very healthy. Fine Gael finance spokesman Richard Bruton said the deficit showed that Government overspending was "starting to bite. Minister Cowen likes to talk about prudence but is not showing much inclination to put this into practice."