Ireland risks breaching the Maastricht Stability and Growth Pact guidelines by 2004/2005 on current tax and spending patterns, IIB Bank chief economist Mr Austin Hughes has warned.

According to the latest Exchequer figures released by the Department of Finance yesterday, spending is still growing by more than 20 per cent, while revenues are only up 2.6 per cent.

The figures make the task of framing the next Budget as well as agreeing the Estimates even more difficult for the Minister for Finance, Mr McCreevy.

The Minister has warned in no uncertain terms that spending demands from other departments will have to be cut back this year. Nevertheless, the cost of measures announced in last December's Budget is likely to add £450 million (€571 million) next year, while there will be pressure on spending from the Government's soon-to-be announced health initiative and increases in social security before the election.

According to Mr Hughes, there is likely to be substantial pressure from public sector pay, both through the Buckley review and the benchmarking process. "If it the benchmarking were to arrive at recommendations similar to the Buckley review, this could add £250 million to next year's spending and a further £750 million to the 2003 outturn," he said. If this happened, the public sector pay bill could rise by 15 per cent in 2002 and 2003. "On the assumption that capital spending is not cut back, this would mean the public finances risk being in breach of the Maastricht guidelines by 2004."

The Minister is facing problems on how he frames measures in the Budget. Institutions such as the ESRI and the Central Bank have called for a balanced budget which leaves space for tax cuts to boost spending. According to the ESRI, this could mean tax cuts of up to a maximum of £700 million.

According to observers, it should also seek to instil some confidence into the electorate. This means it is not a matter of simply giving money away. The Tβnaiste, Ms Harney, has reiterated that cutting the top rate of tax to 40 per cent is not on the agenda.

Instead, the Government is focusing on taking the first £200 a week, or those on the minimum wage, out of the tax net. Large increases in child benefit have also been promised.

Whatever Mr McCreevy decides, he will be operating under tighter strictures than in the past. Revenue growth will clearly no longer bail out profligate spending as pressure increases on most taxes, from income tax to VAT, and possibly corporation tax.