Healthy tax revenues ensured government finances remained in surplus at the end of October, leaving the Minister for Finance, Mr McCreevy, plenty of scope for tax reform in his December 3rd Budget. Exchequer returns for the first 10 months of the year showed a surplus of £49 million compared with a deficit of £134 million in the same period last year.
The figures were below market expectations and an end-September surplus of £506 million but analysts attributed this to timing factors, particularly a 21 per cent rise in debt spending due to interest payments on Government debt in October.
Spending on central fund services rose to £3,161 million at end-October from £2,562 million at end-September and £2,612 million at the end of October last year.
Tax receipts showed no signs of slowing down, outstripping last year's levels by nearly 14 per cent, but spending began to catch up with budget estimates after undershooting Government targets earlier in the year.
However, most analysts expect a healthy outturn to the Government finances for the year as a whole and forecast that the current budget could be in surplus by as much as £800 million.
Riada economist Dr Dan McLaughlin said he expects the public finances to be in balance at the end of the year or to record a small surplus, although the Government may choose to bring forward spending from 1998 into this year.
"It is a number that is very much in the hands of the authorities as to how they want to bring it in," Dr McLaughlin said. Whatever the precise final outturn, analysts do not doubt that Mr McCreevy will have plenty of scope for sizeable tax cuts. "Without question he can afford to give chunky tax reductions in terms of the Budget arithmetic. The only issue is how he chooses to do that," said Dr McLaughlin.
Analysts are uncertain whether Mr McCreevy will opt to cut tax rates or broaden tax bands and increase tax-free allowances or a mixture of the two.
Meanwhile, comments by the Bundesbank's chief economist, Mr Otmar Issing, which appeared to prepare the ground for a further German interest rate rise, left European markets uncertain about the interest rate outlook.
Mr Issing pledged that the German central bank would ensure European monetary union gets an inflation-free foundation at its launch and told a banking conference that the national central banks would determine the rate of inflation in the one or two years after EMU starts by the actions they take now and in coming months.
"The task of the national central banks - and among them primarily the Bundesbank which has a special responsibility as guardian of the anchor currency and `model' for the European Central Bank - is clearly defined for the coming months.
"It lies in laying an inflation-free foundation for European monetary union and bringing stable currencies as well as a stability-oriented policy as a legacy into monetary union."
Markets will also keep a close watch on interest rate developments in the UK where the Bank of England's monetary policy committee begins a two-day meeting today, although most analysts expect official UK rates, currently at 7 per cent, to remain on hold.
