The Budget Day package is starting to take shape and the Minister for Finance, Mr McCreevy, finds himself in a most enviable position.

He has up to £200 million for extra spending, above and beyond what was set down in the estimates for 1998. He also has up to £500 million to "give away" in what could be a record tax-cutting package, although he is unlikely to include quite this much in 1998.

With such large sums to play with, the choices are large and very varied. In terms of the tax package, it appears that the Minister may take a somewhat cautious approach. He is more likely to announce a package which reduces taxes by some £350 million in 1998, rather than go for the £500 million bonanza which trade unions have demanded.

However, tax reductions in this Budget will not come into effect until next April and even a package costing £350 million in 1998 would cost the Exchequer some £500 million in a full year.

According to Davy stockbrokers chief economist, Mr Jim O'Leary, the main change on the tax side on Budget Day will be on income tax. He is expecting a package of measures including increases in allowances and bands as well as reductions in the main income tax rates, costing up to £400 million.

However, the question is how will the Minister spread the income tax goodies? The Government came to power with a firm commitment to cut income tax rates, particularly on the part of the Progressive Democrats.

It is understood that the PDs are still pushing for two percentage points off both the top 48 per cent rate and the standard 26 per cent rate of income tax, but that nothing has yet been finally agreed.

The Budget sub-committee, comprising the Taoiseach, Mr Ahern, the Tanaiste, Ms Harney and the Minister for Finance, Mr McCreevy, has met on several occasions, but has not reached a final agreement.

Recent reports that Mr Ahern is moving towards the previous government's package of raising allowances and bands rather than cutting tax rates are seen as premature; most sources expect a mixed package including some rate cuts.

Apart from being seen to meet pre-election commitments, with two by-elections coming up, Mr Ahern is unlikely to be willing to risk the wrath of Ms Harney. Mr McCreevy was also one of the architects of the Fianna Fail tax manifesto and is unlikely to want to back down from the format on which they won the election.

But pressure from the unions - as well as research groups such as the ESRI - should ensure some move in the direction of widening the standard rate income tax band and increasing personal tax allowances.

But even with the money at his disposal, Mr McCreevy will have to make choices, as major reductions in taxes are expensive. The Combat Poverty Agency has called for a £1,300 increase in the personal PAYE tax allowance, as a way of directing the benefits of reform to lower earners. However, this would cost £500 million.

Other reforms are also expensive. Each one percentage point cut in the standard 26 per cent income tax rate will cost £101 million and a 1 percentage point cut in the higher 48 per cent rate will cost £54 million.

Significant tax reductions can also be expected in the corporate sector. The standard Corporation Tax rate is 36 per cent, while a 28 per cent rate applies on the first £50,000 of profits. Manufacturers, international services and IFSC companies are, of course, taxed at 10 per cent.

Mr McCreevy is likely to make a move to bring the standard 36 per cent rate down - and probably the 28 per cent rate also - with a view to moving towards a single rate of 12.5 per cent for all companies within 10 years. Every one percentage point cut in the highest rate of Corporation Tax costs £23 million for a full year.

However, the immediate impact of the Budget for the average worker may be to leave less money in their pockets. The tax reductions will not take effect until April next year, while the excise duty increases which Mr McCreevy will probably impose on cigarettes and petrol will take affect from midnight on December 3rd.

Once tax reductions do appear next April, however, the "feel good" impact may be greater than in recent years. This is because, unlike the last three tax years, there will be no clawback for mortgage holders, as mortgage interest relief will not fall any further. For the past few years, many taxpayers have felt cheated as the benefits of Budget day cuts have been clawed back by a decline in their mortgage interest relief, as it fell back to the standard rate.

On the spending side, Mr McCreevy also has room to be generous. According to his own calculations, he has only spent 1.8 per cent more next year than this year up to the Budget. That leaves him considerable leeway, while still staying within the Government's 4 per cent limit.

However, even on his own admission he has no intention of actually hitting the admittedly inflated ceiling.

Nevertheless, he has substantial amounts to be spent. The bulk is likely to be taken up with social welfare increases. However, with his reputation as the Minister for Social Welfare who implemented the "dirty dozen" social welfare cuts, there are many recipients who will not believe he can be generous until they see the shape of the Budget-day package.

He will also have room to spend on other areas. Extra health spending is expected. And despite the large spending on the capital side for the high technology fund, Mr Padraic Garvey, of Riada Stockbrokers, said he would not be surprised to see significant current spending on education on the day.

After the Budget most commentators are expecting Mr McCreevy to target a surplus on the exchequer finances for next year. Davy's Mr O'Leary is expecting a target Exchequer surplus of £200 million.

The biggest problem with this, according to Mr O'Leary, is that the Department of Finance may be far less sanguine about likely tax receipts next year. Nevertheless, he says that with a bit of "nip and tuck" even the Department should be able to forecast a surplus for the year on Budget day - for the first time in recent history.