THE Government parties have reached a crucial stage in formulating Budget priorities. Last night the Taoiseach signalled that what resources are available will be directed at long term unemployment.

Trying to decide on a package of measures to target this issue is putting pressure on both the tax and spending side of the Budget. On spending, the Government will have to consider whether to breach its own self imposed cap on spending.

Mr Bruton's commitment also signals that the Budgetary tax package will be directed at the lower paid and at measures to encourage business to create jobs. His speech suggested that not much may be left for the general body of taxpayers.

The two sides of the Budget need to be looked at separately. On the spending side, Mr Quinn tied himself to a figure of £12.087 billion, or £96 million more than was announced in the estimates. Broad Government agreement was reached before Christmas that £80 million of this be allocated on Budget day to social welfare increases and the rest to measures to tackle long term unemployment.

However, this spending cap now under pressure. This is because of the late consideration of measures put forward by the Minister for Social Welfare, Mr De Rossa and the Minister for Enterprise and Employment, Mr Richard Bruton, to tackle long term unemployment.

As part of this, Mr De Rossa is seeking £35 million or so extra for welfare measures on Budget day above the £80 million already agreed. While savings can be squeezed in some places and there may be ways of implementing some reforms at low cost, the Government is faced with deciding whether to breach its 1996 spending ceiling for the second time. The original target of restricting the real increase to 2 per cent is already abandoned.

On the tax side, the scope for reliefs appears less than most private sector forecasters had imagined, or the Government parties had themselves hoped, up to recently. Around £100 million appears available for reductions in income tax and employees' PRSI and another £20 million or so for business tax reductions. However, this could still change in the run up to Budget day.

If these measures are to be directed purely at the low paid, then the bulk of the relief will go towards increasing the £50 PRSI allowance, raising other allowances ahead of inflation and increasing the initial income exemption limits. Widening the standard rate income tax band would be a measure benefiting taxpayers in general, particularly low paid single workers.

However, if the total income tax package is restricted to £100 million, then relief to most taxpayers will be limited and few are likely to be better off when the impact of wage increases due this year in moving taxpayers into the higher band is taken into account.

Because scope to fuel the "feel good" factor is not available, the Government may instead decide to cut its losses and concentrate the "selling" of the Budget on tackling long term unemployment.