Further savings on the cost of servicing the national debt may allow the Minister for Finance, Mr McCreevy, to pay for a social welfare package in the Budget, while sticking to his 4 per cent spending ceiling.

The Minister looks likely to announce on Budget day that the cost of serving the debt could be £120 million to £150 million lower than allowed for in the estimates, allowing him to reallocate this money to other areas of spending.

The Minister indicated when he presented the estimates that he would hold spending within the 4 per cent ceiling figure, despite the inevitable extra spending on social welfare and other areas to be announced on Budget day.

Current spending next year is already expected to be 4.9 per cent up on this year. But overall Mr McCreevy is aiming to keep below the 4 per cent annual average figure for the two Budgets of 1998 and 1999. To keep within this target, he would have less than £20 million above what was allocated in the estimates. However, the estimates figures are based on a central fund servicing bill of £3.463 billion last year; the bulk of the central fund is used to pay off the national debt servicing cost. The Minister is now expected to look for savings from the National Treasury Management Agency on these estimates, on the basis that low and falling international interest rates will lead to further savings.

The savings are needed to allow the Government to introduce significant increases in the old-age pension payments on Budget day, as well as general social welfare increases ahead of the rate of inflation.

A document drawn up by the social partners - the employers, farmers, trade unions and community groups - in discussions chaired by the Department of the Taoiseach, said that the Budget should reflect the commitments of the National Anti-Poverty Strategy and target lower earners through tax, pay and social welfare measures. Meanwhile the Budget tax package will be finalised over the coming weeks in negotiations between senior Government Ministers.

It looks likely to include a major increase in the personal income tax allowance, a widening of the standard rate income tax band and a reduction of at least one point in the standard 24 per cent rate.